Behavior of an Efficient Market

Random-Walk Model

Historically, there was a very close link between EMH and the random-walk model and then the Martingale model. The random character of stock market prices was first modelled by Jules Regnault, a French broker, in 1863 and then by Louis Bachelier, a French mathematician, in his 1900 PhD thesis, "The Theory of Speculation". His work was largely ignored until the 1950's; however, beginning in the 1930's scattered, independent work corroborated his thesis. A small number of studies indicated that U.S. stock prices and related financial series followed a random walk model. Research by Alfred Cowles in the '30s and '40s suggested that professional investors were in general unable to outperform the market.


Random Walk

Stock market cannot be predicted.