Random Walk vs. Chaotic Dynamics in Financial Economics

During the past three decades, financial economists have studied in detail the behavior of stock market prices and the prices of derivative securities issued on such stocks. By price behavior we mean the dynamic, period by period, change in the price level of a given stock, such as, the daily closing price of an IBM share and the daily settlement price of the corresponding put or call. The extensive literature that addresses these twin problems is known as the market efficiency theory and the option pricing theory. Both theories constitute significant pillars of modern financial economics and despite various puzzles and anomalies, such as the October 1987 stock market crash, that cannot be explained by market efficiency, there are currently no competing theories that are widely accepted.