Advances in Economics and Business Vol. 4(4), pp. 165 - 181
DOI: 10.13189/aeb.2016.040403
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Random Walk, Ergodicity versus Predictability – The Case of the Budapest Stock Exchange

Bélyácz Iván 1,*, Nagy Bálint Zsolt 2
1 Department of Business Administration, Faculty of Economics, University of Pecs, Hungary
2 Department of Hungarian, Faculty of Economics and Business Administration, Babes-Bolyai University, Romania


In financial markets, the term 'random walk' is frequently used in relation to price movement over a period of time. This highly expressive term simply means that prices do not follow a predictable trend, and so previous movements are unsuitable as a basis for speculation regarding future price changes. There exists, however, another model which is based on the ergodic theorem, and this says that past and present probability distribution define the probability distribution which will dictate future market prices. Clearly, the 'random walk' hypothesis and the ergodic theorem are polar opposites, and, whilst the concept of uncertainty is closely linked to the former, the latter suggests that forecasting is, in fact, possible. This paper examines how the theory of efficient markets and the efficiency of the market itself provide the means to resolve this contradiction. We provide empirical proof concerning the 'random walk' theory, for both the recession and post-recession periods in the case of the stock index of the Hungarian stock market.

Random Walk, Ergodic Theorem, Market Efficiency, Unit Root Tests

Cite this paper
Bélyácz Iván , Nagy Bálint Zsolt . "Random Walk, Ergodicity versus Predictability – The Case of the Budapest Stock Exchange." Advances in Economics and Business 4.4 (2016) 165 - 181. doi: 10.13189/aeb.2016.040403.