An Introduction to Random Walks

Abstract

This chapter introduces the idea of a random walk. In the first section, the emphasis is on the probability background of the random walk. It introduces the classic two-dimensional walk, primarily through the fiction of a gambler, which can be illustrated graphically. This serves two purposes, it underlies the motivation for the sample paths taken by some economic times series and it serves to introduce the partial sum (the gambler’s winnings), which is a critical quantity in subsequent econometric analysis. Some economic examples are given that confirm the likely importance of the random walk as an appropriate model for some economic processes.