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Market Impact with Autocorrelated Order Flow under Perfect Competition

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  • 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
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    References listed on IDEAS

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    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.
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    Cited by:

    1. 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.
    2. Thibault Jaisson, 2014. "Market impact as anticipation of the order flow imbalance," Papers 1402.1288, arXiv.org.
    3. Hyoeun Lee & Kiseop Lee, 2020. "Optimal execution with liquidity risk in a diffusive order book market," Papers 2004.10951, arXiv.org.
    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.
    5. Aur'elien Alfonsi & Pierre Blanc, 2014. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Papers 1404.0648, arXiv.org, revised Jun 2015.
    6. Thibault Jaisson, 2015. "Liquidity and Impact in Fair Markets," Papers 1506.02507, arXiv.org.
    7. Jonathan Donier & Julius Bonart, 2014. "A Million Metaorder Analysis of Market Impact on the Bitcoin," Papers 1412.4503, arXiv.org, revised Sep 2015.
    8. Aurélien Alfonsi & Pierre Blanc, 2016. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Post-Print hal-00971369, HAL.
    9. Olivier Guéant, 2016. "The Financial Mathematics of Market Liquidity: From Optimal Execution to Market Making," Post-Print hal-01393136, HAL.

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