Price Impact

Details Price Impact Price Impact

2009-03-13

arxiv.org/abs/0903.2428v1

Economy

Quantitative Finance

Trading and Market Microstructure

Entry for the upcoming "Encyclopedia of Quantitative Finance"

Scientific paper

We define what "Price Impact" means, and how it is measured and modelled in the recent literature. Although this notion seems to convey the idea of a forceful and intuitive mechanism, we discuss why things might not be that simple. Empirical studies show that while the correlation between signed order flow and price changes is strong, the impact of trades on prices is neither linear in volume nor permanent. Impact allows private information to be reflected in prices, but by the same token, random fluctuations in order flow must also contribute to the volatility of markets.

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