Evidence on the Speed of Convergence to Market Efficiency, forthcoming: Journal of Financial Economics
Daily returns for stocks listed on the New York Exchange (NYSE) are not serially dependent. In contrast, order imbalances on the same stocks are highly persistent from day to day. These two empirical facts can be reconciled if sophisticated investors react to order imbalances within the trading day by engaging in countervailing trades sufficient to remove serial dependence over the daily horizon. How long does this actually take? The pattern of intra-day serial dependence, over intervals ranging from five minutes to one hour, reveals traces of efficiency-creating actions. For the actively traded NYSE stocks in our sample, it takes longer than five minutes for astute investors to begin such activities. By thirty minutes, they are well along on their daily quest.