A Simple Microstructural Explanation of Concave Pice Impact

23 Pages Posted: 30 Jan 2020

See all articles by Sergey Nadtochiy

Sergey Nadtochiy

Department of Applied Mathematics

Date Written: January 7, 2020

Abstract

This article describes a simple model of market microstructure which explains a concave price impact. In the proposed model, the local relationship between the order flow and the fundamental price (i.e. the local price impact) is linear, which makes the model dynamically consistent. Nevertheless, the expected impact on midprice from a large sequence of co -directional trades is nonlinear and asymptotically concave. The main practical conclusion of the model is that, throughout a meta-order, the volumes at the best bid and ask prices change (on average) in favor of the executor. This conclusion, in turn, relies on two more concrete
predictions of the model, one of which is tested using publicly available market data without the information about meta-orders.

Suggested Citation

Nadtochiy, Sergey, A Simple Microstructural Explanation of Concave Pice Impact (January 7, 2020). Available at SSRN: https://ssrn.com/abstract=3515008 or http://dx.doi.org/10.2139/ssrn.3515008

Sergey Nadtochiy (Contact Author)

Department of Applied Mathematics ( email )

Stuart Graduate School of Business
565 W. Adams St.
Chicago, IL 60661
United States

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