The Random Walk Model in Finance: A New Taxonomy

Abstract

The backbone of financial risk modeling in finance over a long time period of more than a century, the random walk hypothesis has shown substantial variations in its structure throughout its history. In this article, I revisit the history of the random walk model in finance by introducing a new way of describing what a random walk is, based on the Lévy measure in the Fourier space, a tool that has not yet been used in the history of financial thought. With this lens, we are able to understand the overview of the life of this model in finance over the entire 20th century, including the precursors of the 19th century.