18
votes
Market impact, why square root?
I found this power point and this paper to be an excellent source on this topic.
Here is a quote from the paper:
A square-root singularity for small traded volumes is highly
non-trivial, and ...
- 422
8
votes
Market impact, why square root?
My understanding (devoid of any mathematical grounding) is as follows.
v = Turnover PER UNIT TIME
n = Shares you need to execute
therefore
...
- 369
8
votes
Accepted
How can we estimate new stock price after a large purchase?
There are a number of price impact models which seek to predict the bias induced on prices by trading. There are also issues with some of these models (which I will mention later).
Models
Probably the ...
- 2,972
6
votes
How can we estimate new stock price after a large purchase?
Let me try to answer: I have seen how equity trades are executed at the order book level. Let's say the price of the stock is 100 (last traded price). Let's say the order book is as follows:
Bids: ...
- 6,500
4
votes
Accepted
How to measure market depth?
There is no official definition of market depth (this is only a qualitative concept), only the cost of a roundtrip for a given number of shares of contracts. Take $V$ shares, on average, knowing the ...
- 12.6k
3
votes
How can we estimate new stock price after a large purchase?
I’m by no means an “expert”, though I’ve spent a fair amount of time studying this and writing quant software.
There are three important starting places to study this question, in this order:
1 dark ...
- 151
3
votes
Market Impact proportional to the bid-ask spread
There are multiple models for price impact and the one you have listed here is not the latest. You can see a writeup of a few of the most popular and recent models in this answer.
We can think of a ...
- 2,972
3
votes
Optimal execution of illiquid securities
Please note that my answer is primarily opinion/experience based. If it is not appropriate I will take it down or edit accordingly.
How should I begin to think about optimal execution given a choice ...
- 4,368
3
votes
To what degree is volume correlated with price impact?
Market impact corresponds to price moves due to the intensity of trading in one direction. As you mention: when a market participant trades in size in one direction, the price usually follows.
They ...
- 12.6k
2
votes
The noise trader explanation of concave market impact
Generally any simple agent-based model where one assumes that one agent is a noise trader, an unsophisticated trader that generally has little predictive power in their trading behaviour, is a "...
- 1,282
2
votes
Accepted
Relation between price changes and trading volume (market impact)
See Kandel and Pearson (1995) and Kim and Verrecchia (1991, 1994, 1997).
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2
votes
Matlab Portfolio Optimization with bid ask spread
I can suggest a simple way that is not perfect but is reasonable and not too difficult.
Transaction Costs Will Change the Optimal Portfolio
What you want to do is account for the transactions costs of ...
- 2,972
2
votes
Is there a standard model for market impact?
The square root law is a quite simple and popular model for price impact estimation:
$$\Delta p = Y\sigma\sqrt{\frac{Q}{V}}$$
where:
$\Delta p$ is the price impact,
$Y$ is a constant (needs to be ...
- 283
2
votes
Positive market impact
Personally I believe that the market impact can only be negative from a new trade completion.
If you want to address the second trader's view about providing liquidity to the market consider this ...
- 12.1k
1
vote
Reference for Aggregated Temporary Price Impact
I think what you are looking for is usually captured by Hawkes models.
The reference paper is certainly Bacry, Emmanuel, Sylvain Delattre, Marc Hoffmann, and Jean-François Muzy. "Some limit ...
- 12.6k
1
vote
Is the impact of "small" orders on market dynamics more than is commonly assumed?
If the assumption that a "small" order does not affect price dynamics is not false. Nevertheless, in the context of backtest, they are other aspects that cannot be neglected:
During a back, ...
- 12.6k
1
vote
Market Impact: Going from 1/2 power to 3/2
So I just realized that the $3/2$ doesn't come from an integral, but from a "totaling".
If we have some quantity $V_O$ that we want to execute at price $S_0$, and we receive a price $S_T$ ...
- 469
1
vote
Computing market impact from the order book?
If you have a tick by tick series you can plot cumulative Price*Volume on X axis and prices on Y axis in a XY scatter plot. Then you can derive market impact from the steepness of the resulting line ...
- 11
1
vote
Market impact estimation
The market impact is the influence of the pressure exerted by the flow of metaorders on price dynamics.
Metaorders are large orders issued in general by asset managers or investment banks; they are ...
- 12.6k
1
vote
Market impact in stress
I will attempt to elaborate on this from risk management perspective.
scenario analysis approach: An example of this is stress testing that Fed mandates for investment banks. Fed gives stress ...
- 233
1
vote
Can someone explain to me the square root law of market impact?
A lot of the literature relies on estimating impacts of large orders (n), typically from major funds, that are split into child orders and executed over some period. Usually this data is proprietary ...
- 19
1
vote
Permanent or long-term (months) market impact of large trades in stocks / equities
IMHO there is a general shift toward algorithmic execution for institutionz over the last 5 to 10 years, and depending on your method of execution the price impact can vary, so I am not certain ...
- 251
1
vote
How rapidly should estimated volatility and volume change for estimating market impact in small markets?
This is a difficult problem, especially since estimating the volatility faces a number of issues:
the classic "pollution" of realized variance by bid-ask bounce when using intraday data (cf ...
- 2,972
1
vote
impact model what volatility to use
This is actually a deceptively good question because, as we all know, estimates of variance are extremely sensitive to sampling frequency, sampling intervals, and lags. This is because not all stock ...
- 3,025
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