dorsal/arxiv
View SchemaMechanical vs. informational components of price impact
| Authors | J. Doyne Farmer, Neda Zamani |
|---|---|
| Categories | |
| ArXiv ID | physics/0608271 |
| URL | https://arxiv.org/abs/physics/0608271 |
| DOI | 10.1140/epjb/e2006-00384-5 |
Abstract
We study the problem of what causes prices to change. We define the mechanical impact of a trading order as the change in future prices in the absence of any future changes in decision making, and its it informational impact as the remainder of the total impact once mechanical impact is removed. We introduce a method of measuring mechanical impact and apply it to order book data from the London Stock Exchange. The average mechanical impact of a market order decays to zero as a function of time, at an asymptotic rate that is consistent with a power law with an exponent of roughly 1.7. In contrast the average informational impact builds to approach a constant value. Initially the impact is entirely mechanical, and is about half as big as the asymptotic informational impact. The size of the informational impact is positively correlated to mechanical impact. For cases where the mechanical impact is zero for all times, we find that the informational impact is negative, i.e. buy market orders that have no mechanical impact at all generate strong negative price responses.
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"abstract": "We study the problem of what causes prices to change. We define the\nmechanical impact of a trading order as the change in future prices in the\nabsence of any future changes in decision making, and its it informational\nimpact as the remainder of the total impact once mechanical impact is removed.\nWe introduce a method of measuring mechanical impact and apply it to order book\ndata from the London Stock Exchange. The average mechanical impact of a market\norder decays to zero as a function of time, at an asymptotic rate that is\nconsistent with a power law with an exponent of roughly 1.7. In contrast the\naverage informational impact builds to approach a constant value. Initially the\nimpact is entirely mechanical, and is about half as big as the asymptotic\ninformational impact. The size of the informational impact is positively\ncorrelated to mechanical impact. For cases where the mechanical impact is zero\nfor all times, we find that the informational impact is negative, i.e. buy\nmarket orders that have no mechanical impact at all generate strong negative\nprice responses.",
"arxiv_id": "physics/0608271",
"authors": [
"J. Doyne Farmer",
"Neda Zamani"
],
"categories": [
"physics.soc-ph",
"q-fin.TR"
],
"doi": "10.1140/epjb/e2006-00384-5",
"title": "Mechanical vs. informational components of price impact",
"url": "https://arxiv.org/abs/physics/0608271"
},
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