IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1305.0413.html
   My bibliography  Save this paper

Permanent market impact can be nonlinear

Author

Listed:
  • Olivier Gu'eant

Abstract

There are two schools of thought regarding market impact modeling. On the one hand, seminal papers by Almgren and Chriss introduced a decomposition between a permanent market impact and a temporary (or instantaneous) market impact. This decomposition is used by most practitioners in execution models. On the other hand, recent research advocates for the use of a new modeling framework that goes down to the resilient dynamics of order books: transient market impact. One of the main criticisms against permanent market impact is that it has to be linear to avoid dynamic arbitrage. This important discovery made by Huberman and Stanzl and Gatheral favors the transient market impact framework, as linear permanent market impact is at odds with reality. In this paper, we reconsider the point made by Gatheral using a simple model for market impact and show that permanent market impact can be nonlinear. Also, and this is the most important part from a practical point of view, we propose different statistics to estimate permanent market impact and execution costs that generalize the ones proposed in Almgren at al. (2005).

Suggested Citation

  • Olivier Gu'eant, 2013. "Permanent market impact can be nonlinear," Papers 1305.0413, arXiv.org, revised Mar 2014.
  • Handle: RePEc:arx:papers:1305.0413
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1305.0413
    File Function: Latest version
    Download Restriction: no

    References listed on IDEAS

    as
    1. Aur'elien Alfonsi & Antje Fruth & Alexander Schied, 2007. "Optimal execution strategies in limit order books with general shape functions," Papers 0708.1756, arXiv.org, revised Feb 2010.
    2. 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.
    3. Alexander Schied & Torsten Schoneborn & Michael Tehranchi, 2010. "Optimal Basket Liquidation for CARA Investors is Deterministic," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(6), pages 471-489.
    4. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
    5. Aurelien Alfonsi & Antje Fruth & Alexander Schied, 2010. "Optimal execution strategies in limit order books with general shape functions," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 143-157.
    6. Robert Almgren, 2003. "Optimal execution with nonlinear impact functions and trading-enhanced risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(1), pages 1-18.
    7. Aurélien Alfonsi & Alexander Schied, 2010. "Optimal trade execution and absence of price manipulations in limit order book models," Post-Print hal-00397652, HAL.
    8. Gur Huberman & Werner Stanzl, 2004. "Price Manipulation and Quasi-Arbitrage," Econometrica, Econometric Society, vol. 72(4), pages 1247-1275, July.
    9. Jim Gatheral, 2010. "No-dynamic-arbitrage and market impact," Quantitative Finance, Taylor & Francis Journals, vol. 10(7), pages 749-759.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Olivier Guéant, 2016. "The Financial Mathematics of Market Liquidity: From Optimal Execution to Market Making," Post-Print hal-01393136, HAL.
    2. Daniel Hern'andez-Hern'andez & Harold A. Moreno-Franco & Jos'e Luis P'erez, 2017. "Periodic strategies in optimal execution with multiplicative price impact," Papers 1705.00284, arXiv.org, revised May 2018.
    3. Olivier Guéant & Charles-Albert Lehalle, 2015. "General Intensity Shapes In Optimal Liquidation," Mathematical Finance, Wiley Blackwell, vol. 25(3), pages 457-495, July.
    4. Kashyap, Ravi, 2020. "David vs Goliath (You against the Markets), A dynamic programming approach to separate the impact and timing of trading costs," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 545(C).
    5. Aurélien Alfonsi & Alexander Schied, 2010. "Optimal trade execution and absence of price manipulations in limit order book models," Post-Print hal-00397652, HAL.
    6. Arne Lokka & Junwei Xu, 2020. "Optimal liquidation for a risk averse investor in a one-sided limit order book driven by a Levy process," Papers 2002.03379, arXiv.org, revised Oct 2020.
    7. Torsten Schöneborn, 2016. "Adaptive basket liquidation," Finance and Stochastics, Springer, vol. 20(2), pages 455-493, April.
    8. Takashi Kato, 2011. "An Optimal Execution Problem with a Geometric Ornstein-Uhlenbeck Price Process," Papers 1107.1787, arXiv.org, revised Jul 2014.
    9. Arne Lokka & Junwei Xu, 2020. "Optimal liquidation trajectories for the Almgren-Chriss model with Levy processes," Papers 2002.03376, arXiv.org, revised Sep 2020.
    10. Nico Achtsis & Dirk Nuyens, 2013. "A Monte Carlo method for optimal portfolio executions," Papers 1312.5919, arXiv.org.
    11. Aur'elien Alfonsi & Alexander Schied & Florian Klock, 2013. "Multivariate transient price impact and matrix-valued positive definite functions," Papers 1310.4471, arXiv.org, revised Sep 2015.
    12. Aur'elien Alfonsi & Jos'e Infante Acevedo, 2012. "Optimal execution and price manipulations in time-varying limit order books," Papers 1204.2736, arXiv.org.
    13. repec:dau:papers:123456789/7391 is not listed on IDEAS
    14. Antje Fruth & Torsten Schöneborn & Mikhail Urusov, 2014. "Optimal Trade Execution And Price Manipulation In Order Books With Time-Varying Liquidity," Mathematical Finance, Wiley Blackwell, vol. 24(4), pages 651-695, October.
    15. Ludovic Moreau & Johannes Muhle-Karbe & H. Mete Soner, 2014. "Trading with Small Price Impact," Papers 1402.5304, arXiv.org, revised Mar 2015.
    16. 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.
    17. Seungki Min & Costis Maglaras & Ciamac C. Moallemi, 2018. "Cross-Sectional Variation of Intraday Liquidity, Cross-Impact, and their Effect on Portfolio Execution," Papers 1811.05524, arXiv.org.
    18. Aurélien Alfonsi & José Infante Acevedo, 2014. "Optimal execution and price manipulations in time-varying limit order books," Post-Print hal-00687193, HAL.
    19. Jan Kallsen & Johannes Muhle-Karbe, 2014. "High-Resilience Limits of Block-Shaped Order Books," Papers 1409.7269, arXiv.org.
    20. Julia Ackermann & Thomas Kruse & Mikhail Urusov, 2020. "Optimal trade execution in an order book model with stochastic liquidity parameters," Papers 2006.05843, arXiv.org.

    More about this item

    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:1305.0413. 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.