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For both time-series, just plot the log returns. You will see that one is not a Random-Walk .. the S&P500 since you will get values that far beyond the normal distribution. Just watch this video by Benoit Mandelbrot (starting at 11min:54sec). Looking at both graphs, your eyes can fool you making you believe that both are generated by Random Walks...


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I think the main difference even in this little example is the gain-loss asymmetry which is a known stylized fact: When you look at the big bump both time series posses your artificial one is perfectly symmetric whereas the real one takes longer for going up and then crashes in a relatively shorter time frame. This is a known phenomenon in real financial ...


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You have just luckily created 1 path of the random walk by chance that fitted the S&P. You can create another random walk and it will look much different. The efficient markets hypothesis predicts that stock prices behave as random walks, so it is likely that S&P looks similar to that. However, one cannot predict the next step to make a profit, ...


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There's more than one way to do this. One common approach among indices is to take an iterative approach. For instance, you might identify the stocks with weights about 5%, then re-weight so that everything adds up to 1. Then you might identify the sectors that break the 10% limit and re-scale them to be less than 10%. Then re-scale everything to add up to ...


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To price financial instruments such as options, bonds and stocks must be priced so as to be "arbitrage free". The concept of arbitrage can be made precise by one of the fundamental ideas of quantitative finance, the so called Arbitrage Theorem. Put differently the Arbitrage Theorem provides a very elegant and general method for pricing derivative ...



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