Abstract:

Abstract The debate on whether stock prices follow a random walk continues, becoming the foundation of modern portfolio theory. Supporters of the random walk theory still believe that modeling stock prices is a wasteful exercise. However, evidence from momentum pricing strategy and price reversals suggests otherwise. This study aimed to empirically explore the random walk theory in five international stock markets before and during the Covid-19 pandemic from June 30, 2017, to June 30, 2019, and January 1, 2020, to December 31, 2021. A multivariate runs test and a generalised distribution function was applied to investigate the theory. The results revealed no significant difference between the observed S-statistics runs and the expected ones, concluding that it is not common to observe random walks in financial markets consistently. Hence price changes in financial markets are significantly affected not only based on new information and investors’ expectations but also by irrationalities that exist among market participants. These irrationalities can be modeled using a generalised distribution function to produce price patterns.

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