Market impact with multi-timescale liquidity

Michael Benzaquen (michael.benzaquen@polytechnique.edu) and J.-P. Bouchaud (bouchaud@spec.saclay.cea.fr)
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Michael Benzaquen: LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
J.-P. Bouchaud: CFM - Capital Fund Management

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Abstract: We present an extended version of the recently proposed "LLOB" model for the dynamics of latent liquidity in financial markets. By allowing for finite cancellation and deposition rates within a continuous reaction-diffusion setup, we account for finite memory effects on the dynamics of the latent order book. We compute in particular the finite memory corrections to the square root impact law, as well as the impact decay and the permanent impact of a meta-order. The latter is found to be linear in the traded volume and independent of the trading rate, as dictated by no-arbitrage arguments. In addition, we consider the case of a spectrum of cancellation and deposition rates, which allows us to obtain a square root impact law for moderate participation rates, as observed empirically. Our multi-scale framework also provides an alternative solution to the so-called price diffusivity puzzle in the presence of a long-range correlated order flow.

Keywords: Market microstructure; price formation; limit order book; market impact (search for similar items in EconPapers)
Date: 2018-04-25
New Economics Papers: this item is included in nep-mst
Note: View the original document on HAL open archive server: https://hal.science/hal-02323248v1
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Citations: View citations in EconPapers (8)

Published in Quantitative Finance, 2018, 18 (11), pp.1781-1790. ⟨10.1080/14697688.2018.1444279⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02323248

DOI: 10.1080/14697688.2018.1444279

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