The long memory of the efficient market
For the London Stock Exchange we demonstrate that the signs of orders obey a long-memory process. The autocorrelation function decays roughly as $\tau^{-\alpha}$ with $\alpha \approx 0.6$, corresponding to a Hurst exponent $H \approx 0.7$. This implies that the signs of future orders are quite predi...
| Main Authors: | , |
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| Format: | Journal article |
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2003
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| _version_ | 1797051211458805760 |
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| author | Lillo, F Farmer, J |
| author_facet | Lillo, F Farmer, J |
| author_sort | Lillo, F |
| collection | OXFORD |
| description | For the London Stock Exchange we demonstrate that the signs of orders obey a long-memory process. The autocorrelation function decays roughly as $\tau^{-\alpha}$ with $\alpha \approx 0.6$, corresponding to a Hurst exponent $H \approx 0.7$. 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. This tends to make the returns whiter. We show that some institutions display long-range memory and others don't. |
| first_indexed | 2024-03-06T18:16:42Z |
| format | Journal article |
| id | oxford-uuid:04dd690e-b085-470e-8314-7cd71ce7bec8 |
| institution | University of Oxford |
| last_indexed | 2024-03-06T18:16:42Z |
| publishDate | 2003 |
| record_format | dspace |
| spelling | oxford-uuid:04dd690e-b085-470e-8314-7cd71ce7bec82022-03-26T08:54:03ZThe long memory of the efficient marketJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:04dd690e-b085-470e-8314-7cd71ce7bec8Symplectic Elements at Oxford2003Lillo, FFarmer, JFor the London Stock Exchange we demonstrate that the signs of orders obey a long-memory process. The autocorrelation function decays roughly as $\tau^{-\alpha}$ with $\alpha \approx 0.6$, corresponding to a Hurst exponent $H \approx 0.7$. 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. This tends to make the returns whiter. We show that some institutions display long-range memory and others don't. |
| spellingShingle | Lillo, F Farmer, J The long memory of the efficient market |
| title | The long memory of the efficient market |
| title_full | The long memory of the efficient market |
| title_fullStr | The long memory of the efficient market |
| title_full_unstemmed | The long memory of the efficient market |
| title_short | The long memory of the efficient market |
| title_sort | long memory of the efficient market |
| work_keys_str_mv | AT lillof thelongmemoryoftheefficientmarket AT farmerj thelongmemoryoftheefficientmarket AT lillof longmemoryoftheefficientmarket AT farmerj longmemoryoftheefficientmarket |