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The Long Memory of the Efficient Market
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.
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Citations
Cites
Zipf Distribution of U.S. Firm Sizes
Axtell, R. L. (2001) · Science · doi:10.1126/science.1062081 · Cited by 1,839
Cited by
Physical approach to complex systems
Kwapień, J., & Drożdż, S. (2012) · Physics Reports · doi:10.1016/j.physrep.2012.01.007 · Cited by 517
Some comments on Hurst exponent and the long memory processes on capital markets
Sánchez Granero, M. A., Trinidad Segovia, J. E., & García Pérez, J. (2008) · Physica A: Statistical Mechanics and its Applications · doi:10.1016/j.physa.2008.05.053 · Cited by 276
The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis
Menkhoff, L., & Taylor, M. P. (2007) · Journal of Economic Literature · doi:10.1257/jel.45.4.936 · Cited by 78
Metadata
- Authors
- Lillo, F., & Farmer, J. D.
- Venue
- Studies in Nonlinear Dynamics & Econometrics
- Publisher
- Walter de Gruyter GmbH
- Published
- 2004-09-16
- Volume
- 8
- Issue
- 3
- ISSN
- 1081-1826 (ISSN-L)
- 1558-3708
- OpenAlex
- W1986437822
- Cited by
- 360
- References
- 1
- FWCI
- 30.03
- Type
- journal article
- Language
- en
- Open access
- closed
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