Technical Note—The Random Nature of Stock-Market Prices

J. F. Barrett and D. J. Wright
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J. F. Barrett: University Engineering Department, Cambridge, England
D. J. Wright: University Engineering Department, Cambridge, England

Operations Research, 1974, vol. 22, issue 1, 175-177

Abstract: This note suggests that the behavior of stock-market prices may be modelled by using a stochastic differential equation given the interpretation due to Ito rather than that of ordinary calculus. The workings of the stock market are shown to conform intuitively to this interpretation; an important conclusion is that the observed rise in stock prices can be attributed to deterministic effects. Under ordinary calculus this rise can be explained as due to purely random disturbances.

Date: 1974
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