Sunday 12 May 2013

Predict stock price - a simple normal model

I was reading a book recently - "Bursts: The Hidden Pattern Behind Everything We Do" by Albert-László Barabási, who is a physicist doing research in Networking theory. Here is from the book:

Can we scientifically predict our future? Scientists and pseudoscientists have been pursuing this mystery for hundreds and perhaps thousands of years. But now, amazing new research is revealing that patterns in human behavior, previously thought to be purely random, follow predictable laws.

Well just like what Albert studied, as in financial area:

Can we scientifically predict the stock price? The stock price is thought to be purely random, but will it follow certain predictable laws?

As you may know in basic financial mathematics theory, the stock price is assumed to follow the geometric brownian motion(log normal). Let's forget it at the moment, and try to describe the stock price with a simple distribution, and we need to address below two questions:
  1. Is normal distribution a good fit for the return of Apple?
  2. How can we use this model to get the stock price of Apple in the future?
Here is the result and you may find this link userful.



To answer the question:
  1. Is normal distribution a good fit for the return of Apple? - It is not good but we can find out some pattern.
  2. How can we use this model to get the stock price of Apple in the future? - we can assume the price follows a normal distribution with sample mean/variance, pick up randomly for a price, but sorry this may not give you great confidence in results,lol.


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