Martingale models replaced random walks as the preferred formulation of weak-form efficiency.

Evidence

Different authors meant somewhat different things by “random walk,” but the most common meaning was that “successive price changes are independent, identically distributed random variables. Most simply, this implies that the series of price changes has no memory, that is, the past cannot be used to predict the future in any meaningful way.” (Fama 1965, p. 34) That property implied “weak form” efficiency. However, the latter was also implied by martingale (“fair game”) models that were more general than the original conception of random walks. After these martingale formulations were introduced in the mid 1960s by Samuelson (and also by Benoit Mandelbrot) they tended to replace random walks as the preferred mathematical formulations of weakform efficiency. — Donald MacKenzie, An Engine, Not a Camera, 293

Categorization

• DEFINE: Distinguishes random walk from the more general martingale/fair-game formulation, a technical precision central to the efficiency literature.
• XREF: Connects to mainstream finance’s efficient-market history; the random-walk-to-martingale shift is often elided in popular accounts. — connects to: Derivative prices equal discounted expected payoffs under an equivalent martingale measure — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 621; Merton’s stochastic calculus reframed derivatives pricing in terms of martingale theory — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 143; Random-walk prices and market efficiency transformed US finance in the 1950s-60s — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 256

Broader Connections

• Merton’s stochastic calculus reframed derivatives pricing in terms of martingale theory #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 143
• Derivative prices equal discounted expected payoffs under an equivalent martingale measure #expands (0.72) — Donald MacKenzie, An Engine, Not a Camera, 621
• Random-walk prices and market efficiency transformed US finance in the 1950s-60s #complicates (0.72) — Donald MacKenzie, An Engine, Not a Camera, 256