| BUSINESSWEEK ONLINE : JANUARY 25, 1999 ISSUE | ||||||||
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| READERS REPORT
A Stock Will Do Again What It Did Before ''A less-than-random walk'' (Economic Trends, Dec. 21) describes the so-called momentum effect, whereby stocks that have done better than the market in the past tend to do better than the market in the future. Superficially, such behavior seems to violate the efficient-market hypothesis, which predicts that past stock-price behavior should not be correlated with future prices. But random walks (flips of an unbiased coin, for example) also exhibit what might be interpreted as a momentum effect. One property of a random walk is the number of changes of sign in a given number of trials. A trial might be a flip of a coin, or it might be a certain time interval after which the value of a stock is reassessed (an hour, a day, a week). A change of sign occurs whenever what had been a winner (profit in a stock, or more heads than tails in coin flipping) becomes a loser (loss in a stock, or more tails than heads), or when what had been a loser becomes a winner. Of all the possible sequences of sign changes in a random walk, the highest probability is for zero changes of sign. That is, a stock that executes a random walk and starts out a winner (increases in value in the first trial, or time increment, after its purchase) has a higher probability of remaining a winner than it has of any other possible combination of winning and losing during the same number of trials. Similarly a stock that starts out a loser has the highest probability of remaining a loser. And when sign changes do occur, they occur much less frequently than most people would expect for a random process. George W. Pearsall Durham, N.C. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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