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Linear models for the impact of order flow on prices. I. History dependent impact models

Author

Listed:
  • Damian Eduardo Taranto
  • Giacomo Bormetti
  • Jean-Philippe Bouchaud
  • Fabrizio Lillo
  • Bence Tóth

Abstract

Market impact is a key concept in the study of financial markets and several models have been proposed in the literature so far. The propagator model posits that the price at high frequency time scales is a linear combination of the signs of the past executed market orders, weighted by a so-called propagator function. This model needs to be extended since prices are a priori influenced not only by the past order flow, but also by the past realization of returns themselves. In this paper, we propose a two-event framework, where price-changing and non price-changing events are considered separately. We show that two-event propagator models provide a remarkable improvement of the description of the market impact, especially for large tick stocks, where the events of price changes are very rare and very informative. Specifically the extended approach captures the excess anti-correlation between past returns and subsequent order flow which is missing in one-event models.

Suggested Citation

  • Damian Eduardo Taranto & Giacomo Bormetti & Jean-Philippe Bouchaud & Fabrizio Lillo & Bence Tóth, 2018. "Linear models for the impact of order flow on prices. I. History dependent impact models," Quantitative Finance, Taylor & Francis Journals, vol. 18(6), pages 903-915, June.
    • Handle: RePEc:taf:quantf:v:18:y:2018:i:6:p:903-915
    DOI: 10.1080/14697688.2017.1395903
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    Citations

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    Cited by:

    1. Maxime Morariu-Patrichi & Mikko S. Pakkanen, 2018. "State-dependent Hawkes processes and their application to limit order book modelling," Papers 1809.08060, arXiv.org, revised Sep 2021.
    2. Alexander Barzykin & Fabrizio Lillo, 2019. "Optimal VWAP execution under transient price impact," Papers 1901.02327, arXiv.org, revised Jan 2019.
    3. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2022. "Cross impact in derivative markets," Post-Print hal-03378903, HAL.
    4. Francesco Cordoni & Fabrizio Lillo, 2022. "Transient impact from the Nash equilibrium of a permanent market impact game," Papers 2205.00494, arXiv.org, revised Mar 2023.
    5. Fabrizio Lillo, 2021. "Order flow and price formation," Papers 2105.00521, arXiv.org.
    6. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2021. "Cross impact in derivative markets," Working Papers hal-03378903, HAL.
    7. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2021. "Cross impact in derivative markets," Papers 2102.02834, arXiv.org, revised Mar 2022.
    8. Maxime Morariu-Patrichi & Mikko Pakkanen, 2018. "State-dependent Hawkes processes and their application to limit order book modelling," CREATES Research Papers 2018-26, Department of Economics and Business Economics, Aarhus University.
    9. Xin Guo & Charles-Albert Lehalle & Renyuan Xu, 2022. "Transaction cost analytics for corporate bonds," Quantitative Finance, Taylor & Francis Journals, vol. 22(7), pages 1295-1319, July.
    10. Rama Cont & Mihai Cucuringu & Chao Zhang, 2021. "Cross-Impact of Order Flow Imbalance in Equity Markets," Papers 2112.13213, arXiv.org, revised Jun 2023.

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