CSL Computer Stock

In recent years, students of finance have devoted much effort to answering the question of whether the daily price of a stock share can be described by a Markov chain. Suppose the daily price of a stock share (such as CSL Computer stock) can be described by a Markov chain. What does that tell us? Simply that the probability distribution of tomorrow’s price for one share of CSL stock depends only on today’s price of CSL stock, not on the past prices of CSL stock. If the price of a stock share can be described by a Markov chain, the “chartists” who attempt to predict future stock prices on the basis of the patterns followed by past stock prices are barking up the wrong tree. For example, suppose the daily price of a share of CSL stock follows a Markov chain, and today’s price for a share of CSL stock is $50. Then to predict tomorrow’s price of a share of CSL stock, it does not matter whether the price has increased or decreased during each of the last 30 days. In either situation (or any other situation that might have led to today’s $50 price), a prediction of tomorrow’s stock price should be based only on the fact that today’s price of CSL stock is $50. At this time, the consensus is that for most stocks the daily price of the stock can be described as a Markov chain. This idea is often referred to as the efficient market hypothesis.