Linear models for the impact of order flow on prices. I. History dependent impact models
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Publication:4554471
DOI10.1080/14697688.2017.1395903zbMATH Open1400.91564arXiv1602.02735OpenAlexW2793113486MaRDI QIDQ4554471FDOQ4554471
Authors: Damian Eduardo Taranto, Jean-Philippe Bouchaud, Fabrizio Lillo, Giacomo Bormetti, Bence Tóth 
Publication date: 14 November 2018
Published in: Quantitative Finance (Search for Journal in Brave)
Abstract: Market impact is a key concept in the study of financial markets and several models have been proposed in the literature so far. The Transient Impact Model (TIM) posits that the price at high frequency time scales is a linear combination of the signs of the past executed market orders, weighted by a so-called propagator function. An alternative description -- the History Dependent Impact Model (HDIM) -- assumes that the deviation between the realised order sign and its expected level impacts the price linearly and permanently. The two models, however, should be extended since prices are a priori influenced not only by the past order flow, but also by the past realisation of returns themselves. In this paper, we propose a two-event framework, where price-changing and non price-changing events are considered separately. Two-event propagator models provide a remarkable improvement of the description of the market impact, especially for large tick stocks, where the events of price changes are very rare and very informative. Specifically the extended approach captures the excess anti-correlation between past returns and subsequent order flow which is missing in one-event models. Our results document the superior performances of the HDIMs even though only in minor relative terms compared to TIMs. This is somewhat surprising, because HDIMs are well grounded theoretically, while TIMs are, strictly speaking, inconsistent.
Full work available at URL: https://arxiv.org/abs/1602.02735
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Cited In (10)
- Transient impact from the Nash equilibrium of a permanent market impact game
- Transaction cost analytics for corporate bonds
- Do fundamentals shape the price response? A critical assessment of linear impact models
- A stationary Kyle setup: microfounding propagator models
- Linear models for the impact of order flow on prices. II: The mixture transition distribution model
- Cross-impact and no-dynamic-arbitrage
- A continuous and efficient fundamental price on the discrete order book grid
- Deep learning for limit order books
- When is cross impact relevant?
- Nonlinear price impact from linear models
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