Question

Please succinctly explain the difference between Random Walk and Martingale hypothesis

Answer 1

Defination of Random Walk and Martingale hypothesis :

A) Random Walk Theory :
Random walk theory suggests that changes in stock prices have the same distribution and are independent of each other. This also believes that it can not use the past move or pattern of a stock price or economy to forecast the future movement.
In short, random walk theory notes that stocks take a wild and unpredictable direction that makes all methods of stock price prediction useless in the long run.

B) Martingale Theory :
The Martingale Hypothesis defines that the level of any variable in is equal to the price of the same variable in t using all the information provided in the past. The martingale is a stochastic process, if conditions are met, and is maintained.

The difference between above theory :

Random walking is a discreet time process, vs Basically a continuous time limit for a random walk is not technically a random walk, although it is a Martingale.

The process of Martingale is similar to a one-dimensional random walk.
The only difference is that can change the size of our bet.