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

Downloaded on 28.3.2024 from https://www.degruyter.com/document/doi/10.2202/1558-3708.1226/html
Scroll to top button