For over half a century, financial experts have regarded the movements
of markets as a random walk--unpredictable meanderings akin to a
drunkard's unsteady gait--and this hypothesis has become a cornerstone
of modern financial economics and many investment strategies. Here
Andrew W. Lo and A. Craig MacKinlay put the Random Walk Hypothesis to
the test. In this volume, which elegantly integrates their most
important articles, Lo and MacKinlay find that markets are not
completely random after all, and that predictable components do exist in
recent stock and bond returns. Their book provides a state-of-the-art
account of the techniques for detecting predictabilities and evaluating
their statistical and economic significance, and offers a tantalizing
glimpse into the financial technologies of the future.
The articles track the exciting course of Lo and MacKinlay's research on
the predictability of stock prices from their early work on rejecting
random walks in short-horizon returns to their analysis of long-term
memory in stock market prices. A particular highlight is their
now-famous inquiry into the pitfalls of "data-snooping biases" that have
arisen from the widespread use of the same historical databases for
discovering anomalies and developing seemingly profitable investment
strategies. This book invites scholars to reconsider the Random Walk
Hypothesis, and, by carefully documenting the presence of predictable
components in the stock market, also directs investment professionals
toward superior long-term investment returns through disciplined active
investment management.
