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Financial Noise

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Author:Ivars Peterson (MathTrek)
Description: The conventional view of stock markets and their behavior is that the price of a stock reflects all the information available on that stock. In this model, any variations in price would correspond to the arrival of new information. Some of that information is predictable, and some isn't. If the market works effectively and efficiently, predictable information is already accounted for in the price; a rise or fall has already taken place on the basis of predictions and price fluctuations occur only in response to truly new pieces of information that aren't predictable based on available data. It makes sense, then, to model fluctuations in stock prices as a random (or Markov) process, which proceeds in independent increments. Human ingenuity, fear, intuition, fallibility, and incompetence, however, conspire to complicate the situation...

Levels: Middle School (6-8), High School (9-12), College
Languages: English
Resource Types: Articles
Math Topics: Probability, Stock Market

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