ABSTRACT
Paul Samuelson suggests that an efficient speculative market behaves very much like a random walk process. Random noise in engineering systems is not precisely identical to pure mathematical white noise, but it is close enough so that white noise provides an acceptable approximation. The entire engineering literature on stochastic systems and stochastic control is based on the white noise assumption for the underlying process, and quite rightly so. Random shocks in economic systems cannot be approximated well by white noise. White noise represents the limit of very many small shocks. Small shocks do occur in economics, of course. When economists and econometricians became concerned with modelling economic systems subject to random shocks, they naturally turned to this existing literature. As a result, the white noise assumption has been adopted in economic modelling and in pure economic theory.
