Market Impact: A Systematic Study of Limit Orders
26 Pages Posted: 18 Jul 2017 Last revised: 3 Oct 2018
Date Written: September 5, 2018
This paper is devoted to the important yet little explored subject of the market impact of limit orders. Our analysis is based on a proprietary database of metaorders - large orders that are split into smaller pieces before being sent to the market. We first address the case of aggressive limit orders and then, that of passive limit orders. In both cases, we provide empirical evidence of a power law behaviour for the temporary market impact. The relaxation of the price following the end of the metaorder is also studied, and the long-term impact is shown to stabilize at a level of approximately two-thirds of the maximum impact. Finally, a fair pricing condition during the life cycle of the metaorders is empirically validated.
Keywords: Market Microstructure, Statistical Finance, Market Impact, Fair Pricing, Automated Trading, Limit Orders
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