Order book dynamics and price impact

Philipp Weber and Bernd Rosenow
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Philipp Weber: Universität zu Köln
Bernd Rosenow: Universität zu Köln

A chapter in Practical Fruits of Econophysics, 2006, pp 88-92 from Springer

Abstract: Summary The price impact function describes how prices change if stocks are bought or sold. Using order book data, we explain the shape of the average price impact function by a feedback mechanism due to a strong anticorrelation between price changes and limit order flow. We find that the average price impact function has only weak explanatory power for large price changes. Hence, we study the time dependence of liquidity and find it to be a necessary prerequisite for the explanation of extreme price fluctuation.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-4-431-28915-9_15

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DOI: 10.1007/4-431-28915-1_15

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