Quantifying Long-Term Market Impact

23 Pages Posted: 1 Jul 2021

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Anthony Ledford

Man AHL

Emidio Sciulli

Man AHL

Philipp Ustinov

Man Group plc

Stefan Zohren

University of Oxford - Oxford-Man Institute of Quantitative Finance

Date Written: June 25, 2021

Abstract

Impact costs occur when large buy or sell orders move market prices. The measurement of these costs is crucial for the evaluation of potential trading strategies as well as the successful execution of systematic investment strategies. However, common approaches suffer from a type of myopia: impact is only measured for the current transaction. In many cases, orders are correlated and the impact of the first order will affect the execution of future orders. We propose a new measure that quantifies the long-term effects of market impact: Expected Future Flow Shortfall (EFFS). Our method is both intuitive and straightforward to implement. Importantly, the EFFS method performs competitively with far more complex and data hungry approaches. Our method should be useful for both the evaluation of execution methods as well as the sizing of orders.

Keywords: Impact costs, slippage, square-root law, implementation shortfall, metaorders, child orders, changepoints, systematic strategies, alpha, trading strategies, optimal execution, stitching, propagator

JEL Classification: G11, G12, G13, G23, C58

Suggested Citation

Harvey, Campbell R. and Ledford, Anthony and Sciulli, Emidio and Ustinov, Philipp and Zohren, Stefan, Quantifying Long-Term Market Impact (June 25, 2021). Available at SSRN: https://ssrn.com/abstract=3874261 or http://dx.doi.org/10.2139/ssrn.3874261

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Anthony Ledford

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

HOME PAGE: http://www.ahl.com

Emidio Sciulli

Man AHL ( email )

1239 University Ave
Rochester, NY 14607
United States

Philipp Ustinov

Man Group plc ( email )

2 Swan Lane
London, EC4R 3AD
United Kingdom

Stefan Zohren

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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