The Long Memory of the Efficient Market

Lillo Fabrizio () and J. Farmer
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Lillo Fabrizio: Santa Fe Institute and Istituto Nazionale per la Fisica della Materia, Unita di Palermo

Studies in Nonlinear Dynamics & Econometrics, 2004, vol. 8, issue 3, 35

Abstract: For the London Stock Exchange we demonstrate that the signs of orders obey a long-memory process. The autocorrelation function decays roughly as a power law with an exponent of 0.6, corresponding to a Hurst exponent H = 0.7. This implies that the signs of future orders are quite predictable from the signs of past orders; all else being equal, this would suggest a very strong market inefficiency. We demonstrate, however, that fluctuations in order signs are compensated for by anti-correlated fluctuations in transaction size and liquidity, which are also long-memory processes that act to make the returns whiter. We show that some institutions display long-range memory and others don’t.

Date: 2004
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Working Paper: The long memory of the efficient market (2004)
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DOI: 10.2202/1558-3708.1226

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