Determinants of immediate price impacts at the trade level in an emerging order-driven market
AbstractThe common wisdom argues that, in general, large trades cause large price changes, while small trades cause small price changes. However, for extremely large price changes, the trade size and news play a minor role, while the liquidity (especially price gaps on the limit order book) is a more influencing factor. Hence, there might be other influencing factors of immediate price impacts of trades. In this paper, through mechanical analysis of price variations before and after a trade of arbitrary size, we identify that the trade size, the bid-ask spread, the price gaps and the outstanding volumes at the bid and ask sides of the limit order book have impacts on the changes of prices. We propose two regression models to investigate the influences of these microscopic factors on the price impact of buyer-initiated partially filled trades, seller-initiated partially filled trades, buyer-initiated filled trades, and seller-initiated filled trades. We find that they have quantitatively similar explanation powers and these factors can account for up to 44% of the price impacts. Large trade sizes, wide bid-ask spreads, high liquidity at the same side and low liquidity at the opposite side will cause a large price impact. We also find that the liquidity at the opposite side has a more influencing impact than the liquidity at the same side. Our results shed new lights on the determinants of immediate price impacts.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1201.5448.
Date of creation: Jan 2012
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Publication status: Published in New Journal of Physics 14 (2), 023055 (2012)
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-AGR-2012-02-15 (Agricultural Economics)
- NEP-ALL-2012-02-15 (All new papers)
- NEP-MST-2012-02-15 (Market Microstructure)
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