IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1212.4770.html
   My bibliography  Save this paper

Market Impact with Autocorrelated Order Flow under Perfect Competition

Author

Listed:
  • Jonathan Donier

Abstract

Our goal in this paper is to study the market impact in a market in which the order flow is autocorrelated. We build a model which explains qualitatively and quantitatively the empirical facts observed so far concerning market impact. We define different notions of market impact, and show how they lead to the different price paths observed in the literature. For each one, under the assumption of perfect competition and information, we derive and explain the relationships between the correlations in the order flow, the shape of the market impact function while a meta-order is being executed, and the expected price after the completion. We also derive an expression for the decay of market impact after a trade, and show how it can result in a better liquidation strategy for an informed trader. We show how, in spite of auto-correlation in order-flow, prices can be martingales, and how price manipulation is ruled out even though the bare impact function is concave. We finally assess the cost of market impact and try to make a step towards optimal strategies.

Suggested Citation

  • Jonathan Donier, 2012. "Market Impact with Autocorrelated Order Flow under Perfect Competition," Papers 1212.4770, arXiv.org.
  • Handle: RePEc:arx:papers:1212.4770
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1212.4770
    File Function: Latest version
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    2. F. Lillo & Szabolcs Mike & J. Doyne Farmer, 2004. "A theory for long-memory in supply and demand," Papers cond-mat/0412708, arXiv.org, revised Mar 2005.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thibault Jaisson, 2015. "Liquidity and Impact in Fair Markets," Papers 1506.02507, arXiv.org.
    2. Aurélien Alfonsi & Pierre Blanc, 2016. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Finance and Stochastics, Springer, vol. 20(1), pages 183-218, January.
    3. Aurélien Alfonsi & Pierre Blanc, 2016. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Post-Print hal-00971369, HAL.
    4. Aurélien Alfonsi & Pierre Blanc, 2016. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Finance and Stochastics, Springer, vol. 20(1), pages 183-218, January.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1212.4770. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators). General contact details of provider: http://arxiv.org/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.