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Price Impact

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  • J. P. Bouchaud
  • Capital Fund Management
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    Abstract

    We define what "Price Impact" means, and how it is measured and modelled in the recent literature. Although this notion seems to convey the idea of a forceful and intuitive mechanism, we discuss why things might not be that simple. Empirical studies show that while the correlation between signed order flow and price changes is strong, the impact of trades on prices is neither linear in volume nor permanent. Impact allows private information to be reflected in prices, but by the same token, random fluctuations in order flow must also contribute to the volatility of markets.

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    File URL: http://arxiv.org/pdf/0903.2428
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 0903.2428.

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    Date of creation: Mar 2009
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    Handle: RePEc:arx:papers:0903.2428

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    Web page: http://arxiv.org/

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