I need an estimate of the "permanent" long-term price impact of large institutional trades.
When an investor makes a large trade, there will be a price impact due to the trade. Institutional portfolio managers make very large trade decisions, sometimes choosing to sell \$10M, \$100M, or even \$1B at a time.
I am interested in estimating the price impact of "large" trades (greater than a typical day's dollar volume), over time-spans of the "few weeks / few months / few years".
The idea that I'm pursuing is "herding risk": if a few "holders" each have large positions in an illiquid asset, if one or more of them sells their position, the remaining holders will experience long-term losses (losses that won't improve with time). I'm trying to estimate what these long-term losses might be.
For instance, a stock might have a \$1B market cap, a \$10M daily dollar volume, and a 2% daily volatility. Stock holders Alice, Bob, and Charley each own \$100M of the stock. Alice and Bob both sell fraction $f \in [0,1]$ of their positions. What is the long-term loss incurred by Charley?
Some details to give some more specificity / character / color to the question (thanks to suggestions here and arxiv searches):
- Temporary vs permanent
- Is permanent impact some fraction of peak temporary impact? Or is permanent impact completely independent of temporary impact? Somewhere in between?
- Concave or linear
- some theory suggests concave impact allows for arbitrage (free lunch), but empirical results suggest concave (in the order size) impact is reality.
- Multiple simultaneous
- how does one "sum" market impacts from Alice and Bob (multiple managers)? Do you add dollar volume or add impacts or somewhere in between?
- If a manager sells $1B dollars, surely they will spread the orders over a large amount of time to minimize impact. Does duration affect permanent impact, or just temporary impact?
- How does correlation between signs (sell vs buy) of multiple trades affect impact?
- Is permanent impact "predestined"/exogenous or "arbitrary"/endogenous
- When a stock price falls permanently after a large sell order, did it fall because it was going to fall anyways, or did it fall because of the large sell order?