Anomalous price impact and the critical nature of liquidity in financial markets

Details Anomalous price impact and the critical nature of liquidity in financial markets Anomalous price impact and the critical nature of liquidity in financial markets

2011-05-09

arxiv.org/abs/1105.1694v3

Physical Review X 1, 021006 (2011)

Economy

Quantitative Finance

Trading and Market Microstructure

16 pages, 7 figures

Scientific paper

10.1103/PhysRevX.1.021006

We propose a dynamical theory of market liquidity that predicts that the average supply/demand profile is V-shaped and {\it vanishes} around the current price. This result is generic, and only relies on mild assumptions about the order flow and on the fact that prices are (to a first approximation) diffusive. This naturally accounts for two striking stylized facts: first, large metaorders have to be fragmented in order to be digested by the liquidity funnel, leading to long-memory in the sign of the order flow. Second, the anomalously small local liquidity induces a breakdown of linear response and a diverging impact of small orders, explaining the "square-root" impact law, for which we provide additional empirical support. Finally, we test our arguments quantitatively using a numerical model of order flow based on the same minimal ingredients.

Affiliated with

Also associated with

No associations

Rating

Anomalous price impact and the critical nature of liquidity in financial markets does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Anomalous price impact and the critical nature of liquidity in financial markets, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Anomalous price impact and the critical nature of liquidity in financial markets will most certainly appreciate the feedback.

Rate now

Comments { 0 }

Profile ID: LFWR-SCP-O-334349