Charles Dow Theory Case Study

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• Capital Market which consists of:
1. Stock Markets, which provide financing through the issue of shares or common stock, and enable the subsequent trading thereof.
2. Bond Markets, which provide financing through the issue of bonds, and enable the subsequent trading thereof.
• Commodity Markets, which facilitate the trading of commodities.
• Money Markets, which provide short term debt financing and investment.
• Derivatives Markets, which provide instruments for the management of financial risk.
• Futures Markets, which provide standardized forward contracts for trading products at some future date; see also forward market.
• Insurance Markets, which facilitate the redistribution of various risks.
• Foreign Exchange Markets, which facilitate the trading of foreign exchange.
The capital markets consist
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Charles Dow, one of the founders of Dow Jones & Company and The Wall Street Journal, enunciated a set of ideas on the subject which are now called Dow Theory. This is the basis of the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to the random walk hypothesis, which states that the next change is not correlated to the last change. The scale of changes in price over some unit of time is called the volatility. It was discovered by Benoit Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather modeled better by Levy stable distributions. The scale of change, or volatility, depends on the length of the time unit to a power a bit more than 1/2. Large changes up or down are more likely than what one would calculate using a Gaussian distribution with an estimated standard

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