Order book approach to price impact
Top Cited Papers
- 1 August 2005
- journal article
- research article
- Published by Taylor & Francis in Quantitative Finance
- Vol. 5 (4) , 357-364
- https://doi.org/10.1080/14697680500244411
Abstract
Buying and selling stocks causes price changes, which are described by the price impact function. To explain the shape of this function, we study the Island ECN orderbook. In addition to transaction data, the orderbook contains information about potential supply and demand for a stock. The virtual price impact calculated from this information is four times stronger than the actual one and explains it only partially. However, we find a strong anticorrelation between price changes and order flow, which strongly reduces the virtual price impact and provides for an explanation of the empirical price impact function.Keywords
This publication has 19 references indexed in Scilit:
- Fluctuations and Response in Financial Markets: The Subtle Nature of 'Random' Price ChangesSSRN Electronic Journal, 2003
- A theory of power-law distributions in financial market fluctuationsNature, 2003
- Master curve for price-impact functionNature, 2003
- Quantifying stock-price response to demand fluctuationsPhysical Review E, 2002
- Order Flow and Exchange Rate DynamicsJournal of Political Economy, 2002
- The Dynamic Relation Between Stock Returns, Trading Volume, and VolatilityThe Financial Review, 2001
- Adverse Selection and Competitive Market Making: Empirical Evidence from a Limit Order MarketThe Review of Financial Studies, 2001
- Market depth and order sizeJournal of Financial Markets, 1999
- An ordered probit analysis of transaction stock pricesJournal of Financial Economics, 1992
- Measuring the Information Content of Stock TradesThe Journal of Finance, 1991