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Order book approach to price impact

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  • P. Weber
  • B. Rosenow
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    Abstract

    Buying and selling stocks causes price changes, which are described by the price impact function. To explain the shape of this function, we study the Island ECN orderbook. In addition to transaction data, the orderbook contains information about potential supply and demand for a stock. The virtual price impact calculated from this information is four times stronger than the actual one and explains it only partially. However, we find a strong anticorrelation between price changes and order flow, which strongly reduces the virtual price impact and provides for an explanation of the empirical price impact function.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

    Volume (Year): 5 (2005)
    Issue (Month): 4 ()
    Pages: 357-364

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    Handle: RePEc:taf:quantf:v:5:y:2005:i:4:p:357-364

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    Related research

    Keywords: Order book; Price impact; Resiliency; Liquidity;

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    Cited by:
    1. repec:sfi:sfiwpa:500067 is not listed on IDEAS
    2. Marco Bartolozzi, 2010. "A Multi Agent Model for the Limit Order Book Dynamics," Papers 1005.0182, arXiv.org, revised Oct 2010.
    3. Frédéric Abergel & Grégoire Loeper, 2013. "Pricing and hedging contingent claims with liquidity costs and market impact," Working Papers hal-00802402, HAL.
    4. Schied, Alexander & Schöneborn, Torsten, 2007. "Optimal Portfolio Liquidation for CARA Investors," MPRA Paper 5075, University Library of Munich, Germany.
    5. Matthieu Wyart & Jean-Philippe Bouchaud & Julien Kockelkoren & Marc Potters & Michele Vettorazzo, 2006. "Relation between Bid-Ask Spread, Impact and Volatility in Double Auction Markets," Papers physics/0603084, arXiv.org, revised Mar 2007.
    6. Alexandre F. Roch, 2008. "Liquidity Risk, Price Impacts and the Replication Problem," Papers 0812.2440, arXiv.org, revised Dec 2009.
    7. Chiarella, C. & Iori, G. & Perello, J., 2008. "The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows," Working Papers 08/04, Department of Economics, City University London.
    8. Hans F\"ollmer & Alexander Schied, 2013. "Probabilistic aspects of finance," Papers 1309.7759, arXiv.org.
    9. Bruce Mizrach, 2008. "The next tick on Nasdaq," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 19-40.
    10. Iacopo Mastromatteo & Bence Toth & Jean-Philippe Bouchaud, 2013. "Agent-based models for latent liquidity and concave price impact," Papers 1311.6262, arXiv.org.
    11. J. -P. Bouchaud & J. Kockelkoren & M. Potters, 2004. "Random walks, liquidity molasses and critical response in financial markets," Papers cond-mat/0406224, arXiv.org, revised Jun 2004.
    12. Rene Carmona & Kevin Webster, 2013. "The Self-Financing Equation in High Frequency Markets," Papers 1312.2302, arXiv.org.
    13. Gyarmati, Ákos & Lublóy, Ágnes & Váradi, Kata, 2012. "The Budapest liquidity measure and the price impact function," MPRA Paper 40339, University Library of Munich, Germany.
    14. Alexandre Roch, 2011. "Liquidity risk, price impacts and the replication problem," Finance and Stochastics, Springer, vol. 15(3), pages 399-419, September.
    15. Gu, Gao-Feng & Chen, Wei & Zhou, Wei-Xing, 2008. "Empirical shape function of limit-order books in the Chinese stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(21), pages 5182-5188.
    16. Aurélien Alfonsi & Alexander Schied, 2010. "Optimal trade execution and absence of price manipulations in limit order book models," Post-Print hal-00397652, HAL.
    17. Alexander Schied & Torsten Schöneborn, 2009. "Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets," Finance and Stochastics, Springer, vol. 13(2), pages 181-204, April.
    18. Lublóy, Ágnes & Gyarmati, Ákos & Váradi, Kata, 2012. "Virtuális árhatás a Budapesti Értéktőzsdén
      [Virtual price effects on the Budapest stock exchange]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 508-539.
    19. Kuroda, Koji & Murai, Joshin, 2007. "Limit theorems in financial market models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 383(1), pages 28-34.

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