Mandelbrot on price variation

Abstract

There has been a tradition among economists which holds that prices in speculative markets, such as grain and securities markets, behave very much like random walks. References include Bachelier 1900, Kendall 1953, Osborne 1959, Roberts 1959, Cootner 1962, and Moore 1962. The random walk theory is based on two assumptions: (1) price changes are independent random variables, and (2) the changes conform to some probability distribution. This paper will be concerned with the nature of the distribution of price changes rather than with the assumption of independence. Attention will be focused on an important new hypothesis concerning the form of the distribution which has recently been advanced by Benoit Mandelbrot. We shall see later that if Mandelbrot’s hypothesis is upheld, it will radically revise our thinking concerning both the nature of speculative markets and the proper statistical tools to be used when dealing with speculative prices.