Prediction of Stock Price Movements using Monte Carlo Simulation

Abstract

Monte Carlo Simulation depends on random behaviour of events. When a variable takes values at random and becomes highly unpredictable due to its nature of randomness, the property of random numbers is made use of for predicting the future values that the variable may take. This property can be made use of for predicting share price movements, when the past share prices exhibit random behaviour, without exhibiting high fluctuations. This article explains the methodology of using Monte Carlo Simulation for predicting share price movements and explains the process with the help of an illustration taking the monthly share price data of ITC Limited for a period of 36 months, where the share prices have moved within a narrow band. Findings of the analysis show that it works well and that the method of prediction is reasonably accurate, showing only a minor deviation from the actual prices.