How to Tell the Truth with Statistics: The Daily Change in the Dow, Is it Random?

• Activity Number: 410
• Type: Topic Contributed
• Date/Time: Tuesday, August 5, 2014 : 2:00 PM to 3:50 PM
• Sponsor: Section on Statistical Education
• Author(s): John L. Stedl*+
• Companies: Chicago State University
• Keywords: Dow ; DJIA ; runs test ; randomness ; random sequence ; cause and effect

Abstract

The daily change in the Dow Jones Industrial Average (Dow or DJIA) was plotted quarterly from 2000 to 2011. In virtually every quarter, the null hypothesis of randomness was not rejected (p > 0.05) using the runs test for randomness. This begs the questions: (i)Why then is the media preoccupied with reporting this index and (ii)Why would experts attempt to determine a cause for this apparent randomness? The statistical community, especially those in Business Schools, need to educate students and media as to what randomness looks like, and the role of controlled randomized studies in demonstrating cause and effect. A possible statistical use of the daily changes might still exist, however; namely, view the sequence of changes as a control chart in order to identify statistically significant large absolute changes. This option will be explored, as well as a simulation of the Dow.