Random walk

A random walk is a description of how securities prices change, if price changes are purely random. Similar processes occur in other fields. The term and the concept originated in physics.

In a perfectly efficient market, all information available is reflected in the current price of a security. This means that changes in the price result only from the release of new information, which is completely unpredictable.

If future price changes are unpredictable, the path followed by a price over time is that of a purely random process; there are no patterns in price changes.

This is why the efficient markets hypothesis can not be reconciled with chartism.

The assumption of a random price process is used by many valuation models. For example, the derivation of the Black-Scholes assumes that the price of the underlying security follows a random walk.