The Market Impact Puzzle

19 Pages Posted: 27 Feb 2018

See all articles by Albert S. Kyle

Albert S. Kyle

University of Maryland

Anna A. Obizhaeva

New Economic School (NES)

Date Written: February 4, 2018


Finding a universal market impact formula remains one of the most fascinating puzzles in finance. This paper reviews two possible approaches for imposing restrictions on this formula. First, restrictions can be obtained from a system of economic equations using trading volume and volatility, as suggested by Kyle and Obizhaeva (2017a). Second, restrictions can be derived using dimensional analysis and leverage neutrality, as suggested by Kyle and Obizhaeva (2017b). Except for the knife-edged case of the square root market impact function, additional assumptions related to market microstructure invariance are needed to apply the same market impact formula to all assets simultaneously. This results in a tightly parameterized universal market impact formula suitable for empirical testing.

Keywords: Market microstructure, invariance, liquidity, square root model, market impact, transaction costs, dimensional analysis, leverage neutrality, volume, volatility

JEL Classification: G10, G14, G23

Suggested Citation

Kyle, Albert (Pete) S. and Obizhaeva, Anna A., The Market Impact Puzzle (February 4, 2018). Available at SSRN: or

Albert (Pete) S. Kyle

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Anna A. Obizhaeva (Contact Author)

New Economic School (NES) ( email )

100A Novaya ul
Moscow, Skolkovo 143026

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