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The Long Memory of the Efficient Market

Author

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  • Lillo Fabrizio

    () (Santa Fe Institute and Istituto Nazionale per la Fisica della Materia, Unita di Palermo)

  • Farmer J. Doyne

    () (Santa Fe Institute)

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 dont.

Suggested Citation

  • Lillo Fabrizio & Farmer J. Doyne, 2004. "The Long Memory of the Efficient Market," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(3), pages 1-35, September.
  • Handle: RePEc:bpj:sndecm:v:8:y:2004:i:3:n:1
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