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

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

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)...

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Veröffentlicht in:arXiv.org 2011-11
Hauptverfasser: Toth, Bence, Lemperiere, Yves, Deremble, Cyril, de Lataillade, Joachim, Kockelkoren, Julien, Bouchaud, Jean-Philippe
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Economic models
Mathematical models
Physics - Physics and Society
Physics - Statistical Mechanics
Quantitative Finance - Trading and Microstructure
Stock exchanges
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Lemperiere, Yves
Deremble, Cyril
de Lataillade, Joachim
Kockelkoren, Julien
Bouchaud, Jean-Philippe
description 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.
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subjects Economic models
Mathematical models
Physics - Physics and Society
Physics - Statistical Mechanics
Quantitative Finance - Trading and Microstructure
Stock exchanges
title Anomalous price impact and the critical nature of liquidity in financial markets
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