@Harrogath - I got this from one of the past posts. I did not understand - how past value is the best predictor of the value today when you cannot forecast a Random walk?
A random walk represents a random variable. Random means erratic, something with no predictable forecast. For example, exchange rates are best defined or modeled as random walks. So why E(e)=0 ?, because this means that the best forecast of X(t) is x(t-1). Sounds weird, but the explanation in simple words is that due you have no way to forecast a random walk, its past value is the best predictor of the value today (at t). So on average, E(e) should be zero.
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.