Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter September 16, 2004

The Long Memory of the Efficient Market

Fabrizio Lillo and J. Doyne Farmer

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.

Published Online: 2004-9-16

©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

Scroll Up Arrow