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.

Recommended Citation

Fabrizio Lillo and J. Doyne Farmer (2004) "The Long Memory of the Efficient Market", Studies in Nonlinear Dynamics & Econometrics: Vol. 8: No. 3, Article 1.
http://www.bepress.com/snde/vol8/iss3/art1

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