Bridge over ocean
1 November 1978 Financial Analysts Journal Volume 34, Issue 6

Can Analysts Distinguish between Real and Randomly Generated Stock Prices?

  1. Fred D. Arditti
  2. W. Andrew McCollough

According to academicians, share price movements are completely random, offering no clues to the direction of future price movements. Market technicians have refused to accept this view and argue that statistical tests are less capable than the human eye of detecting subtle patterns in stock price data. If stock price series do have information content, however, technicians should be able to differentiate between actual price data and random walk data generated from the same statistical parameters.

The authors charted three price series — an actual series and two random series based on different probability distributions — for each of five well known common stocks. They then asked a sample of investment analysts to pick the actual price series, without knowing the names of the companies represented or the actual time period. Statistical analysis of the results reveals no evidence of ability to make consistently correct selections.

If analysts cannot differentiate between price series purported to have information content and series with no information content, one is tempted to conclude that past price data have little or no information useful in technical analysis.

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