Mechanical vs. informational components of price impact

DOI10.1140/EPJB/E2006-00384-5zbMATH Open1189.91059arXivphysics/0608271OpenAlexW3103791013MaRDI QIDQ978856FDOQ978856

Authors: J. Martínez 

Publication date: 25 June 2010

Published in: The European Physical Journal B. Condensed Matter and Complex Systems (Search for Journal in Brave)

Abstract: We study the problem of what causes prices to change. We define the mechanical impact of a trading order as the change in future prices in the absence of any future changes in decision making, and its it informational impact as the remainder of the total impact once mechanical impact is removed. We introduce a method of measuring mechanical impact and apply it to order book data from the London Stock Exchange. The average mechanical impact of a market order decays to zero as a function of time, at an asymptotic rate that is consistent with a power law with an exponent of roughly 1.7. In contrast the average informational impact builds to approach a constant value. Initially the impact is entirely mechanical, and is about half as big as the asymptotic informational impact. The size of the informational impact is positively correlated to mechanical impact. For cases where the mechanical impact is zero for all times, we find that the informational impact is negative, i.e. buy market orders that have no mechanical impact at all generate strong negative price responses.

Full work available at URL: https://arxiv.org/abs/physics/0608271

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Mathematics Subject Classification ID

Microeconomic theory (price theory and economic markets) (91B24)

Cites Work

• More statistical properties of order books and price impact
• Large stock price changes: volume or liquidity?
• Market efficiency and the long-memory of supply and demand: is price impact variable and permanent or fixed and temporary?
• Random walks, liquidity molasses and critical response in financial markets

Cited In (9)

• Analysis of trade packages in the Chinese stock market
• Trade co-occurrence, trade flow decomposition and conditional order imbalance in equity markets
• The immediate price impact of trades on the Australian Stock Exchange
• The price impact of order book events: market orders, limit orders and cancellations
• Trading volume in financial markets: an introductory review
• Statistical characteristics of price impact in high-frequency trading
• Is market impact a measure of the information value of trades? Market response to liquidity vs. informed metaorders
• Order book approach to price impact
• Nonlinear price impact from linear models

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