Order book approach to price impact

By Philipp Weber, Bernd Rosenow. 2003

167 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/2bdb88e9d94090dae48ef834ef3efe26eba3d65c

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Citations in the corpus

Integer-valued Lévy processes and low latency financial econometrics (2012, background): “For example, relationships between trade volumes and price changes have been studied by Potters and Bouchaud ( 2003 ) and Lo and Wang ( 2010 ), amongst many, and between order flow and tick price changes by Weber and Rosenow ( 2005 ) and others.”
No-dynamic-arbitrage and market impact (2010, unknown): “…the cumulative order density (book depth) as a function of the price level D̂ and switching the axes, we may compute the virtual impact function of Weber and Rosenow (2005), a function that measures the price impact conditional on trading a given quantity instantaneously using a single market…”
The Price Impact of Order Book Events (2010, unknown): “Arriving limit orders significantly reduce the impact of trades [44] and the concave shape of the price impact function changes depending on the contemporaneous limit order arrivals [41].”
Optimal execution strategies in limit order books with general shape functions (2007, background): “[10], and Weber and Rosenow [21] for empirical studies.”
The short-term price impact of trades is universal (2017, background): “ly negative afterwards. in other words, a ow of buy orders generates a counterow of sell orders, as discussed in many papers (see e.g. (Bouchaud et al., 2006; Eisler et al., 2013; Toth et al., 2012; Weber and Rosenow, 2005)). We also show the correlation C mkt;CFM(˝), measuring how CFM reacts to the”
Computational Visual Analysis of the Order Book Dynamics for Creating High-frequency Foreign Exchange Trading Strategies (2015, background): “In the specific case of the order book dynamics, several studies had shown that order books have relevant information to improve financial price direction prediction [1, 2, 3, 4, 10, 11].”
Relation between bid–ask spread, impact and volatility in order-driven markets (2006, background): “As a result there are in fact very strong high frequency correlations in the order flow, coming from the ‘hide and seek’ game played by buyers and sellers within the order book [15, 16, 34].”
Optimal Basket Liquidation for CARA Investors is Deterministic (2010, unknown): “This decay of price impact reflects the well-established resilience effect of prices after an aggressive trade (see, e.g. Bouchaud et al. (2004) and Weber and Rosenow (2005) for empirical discussions).”
How Markets Slowly Digest Changes in Supply and Demand (2008, unknown): “This result is in good agreement with data from the lse, Zumbach [2004], and from the pse, Wyart et al.”
The price impact of order book events: market orders, limit orders and cancellations (2009, background): “Market orders ‘attract’ limit orders, as noted by Weber and Rosenow (2005), Bouchaud et al. (2006) and Gerig (2008).”
Anomalous price impact and the critical nature of liquidity in financial markets (2011, background): “The empirical analysis of Weber and Rosenow [20] shows very clearly how the volume appearing in the order book is indeed stimulated by the trades themselves.”
High-frequency trading in a limit order book (2008, methodology): “Quantitative Finance, Vol. 8, No. 3, April 2008, 217–224 High-frequency trading in a limit order book MARCO AVELLANEDA and SASHA STOIKOV* Mathematics, New York University, 251 Mercer Street, New York, NY 10012, USA (Received 24 April 2006; in final form 3 April 2007)”