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The demise of constant price impact functions and single-time step models of speculation

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  • Damien Challet

Abstract

Constant and symmetric price impact functions, most commonly used in agent-based market modelling, are shown to give rise to paradoxical and inconsistent outcomes in the simplest case of arbitrage exploitation when open-hold-close actions are considered. The solution of the paradox lies in the non-constant nature of real-life price impact functions. A simple model that includes explicit position opening, holding, and closing is briefly introduced and its information ecology discussed, shedding new light on the relevance of the Minority Game to the study of financial markets.

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  • Damien Challet, 2006. "The demise of constant price impact functions and single-time step models of speculation," Papers physics/0608013, arXiv.org, revised Nov 2006.
    • Handle: RePEc:arx:papers:physics/0608013
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    Cited by:

    1. J. Doyne Farmer & Austin Gerig & Fabrizio Lillo & Henri Waelbroeck, 2013. "How efficiency shapes market impact," Quantitative Finance, Taylor & Francis Journals, vol. 13(11), pages 1743-1758, November.

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