Are the share price's independent of one another
and of the previous day's value?
How would you test this??
To determine whether share prices are independent of one another and the previous day's value, you can conduct a statistical test called correlation analysis. Correlation analysis measures the relationship between two variables and helps to determine if changes in one variable are associated with changes in another variable.
Here's how you can test this:
1. Collect data: Gather historical share price data for multiple stocks or companies over a period of time, including the share prices from consecutive days.
2. Calculate daily returns: Calculate the daily return for each stock by taking the percentage change in the share price from one day to the next. This helps to normalize the values and remove any scaling effects.
3. Compute correlation coefficients: Use a statistical software or Excel to compute the correlation coefficients between the daily returns of different stocks. Correlation coefficients range between -1 and +1, where 0 indicates no correlation, -1 indicates a strong negative correlation, and +1 indicates a strong positive correlation.
4. Analyze the results: Examine the correlation coefficients to determine the relationship between the share prices. A high positive correlation value suggests that changes in one stock's price are positively related to changes in another stock's price. A negative correlation suggests an inverse relationship, while a value close to zero indicates independence.
By performing this analysis, you can assess whether share prices are independent of each other and the previous day's value. However, keep in mind that correlation does not imply causation, and additional factors beyond the scope of this analysis may influence share prices.