Technical Note—The Random Nature of Stock-Market Prices

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.