Market Impact Paradoxes
Wilmott Magazine, March 2014, pp 71-78
20 Pages Posted: 27 Jul 2013 Last revised: 2 May 2014
There are 2 versions of this paper
Market Impact Paradoxes
Market Impact Paradoxes
Date Written: December 11, 2013
Abstract
The market impact (MI) of Volume Weighted Average Price (VWAP) orders is a convex function of a trading rate, but most empirical estimates of transaction cost are concave functions. How is this possible? We show that isochronic (constant trading time) MI is slightly convex, and isochoric (constant trading volume) MI is concave. We suggest a model that fits all trading regimes and guarantees no-dynamic-arbitrage.
Keywords: market impact, dynamic arbitrage, trading engines, Laplace transform
JEL Classification: C13, C21, C44, C61
Suggested Citation: Suggested Citation
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