Market efficiency and the long-memory of supply and demand: Is price impact variable and permanent or fixed and temporary?

The fact that supply and demand fluctuations have longmemory, which was independently discovered by Lillo and Farmer (2004) and Bouchaud et al. (2004), raises an apparent paradox about compatibility with market efficiency. The adage that buying drives the price up and selling drives it down is one of the least controversial statements in finance. The long-memory of supply and demand implies that there are waves of buyerinitiated or seller-initiated transactions that are highly predictable using a simple linear algorithm. All else being equal, this suggests that price movements should also be highly predictabl