While the use of Markov chains — a statistical framework to decipher the probability of one event transitioning to another — in finance is not a novel concept, it’s not deployed effectively. In my research, I have come across two papers analyzing Markovian principles in the stock market: “Stock market analysis with a Markovian approach” by the KTH Royal Institute of Technology and “Forecasting Stock Prices using Markov Chains: Evidence from the Iraqi Stock Exchange” by the University of Sumer.
Conceptually, both papers attempt to decipher the utility of Markov chains to predict future market trajectories, which should yield compelling results. After all, the concept originated from Russian mathematician Andrey Markov, one of the most brilliant scientific minds and thought leaders. Unfortunately, the researchers from the aforementioned academic institutions extracted only negligible to marginal performance metrics relative to a coin toss — so, what the heck is going on here?
