Equity market impact modeling: an empirical analysis for the Chinese market

Shiyu Han, Lan Wu and Yuan Cheng

Journal of Risk

Abstract: Market impact has become a subject of increasing concern among academics and industry experts. We put forward a price impact model that considers the heteroscedasticity of price in the time dimension and the dependency between permanent impact and temporary impact. We discuss and derive the extremum of the expectation of permanent impact and realized impact by constructing several special trading trajectories. We use a large number of trade and quote tick records (17 213 238 343) compiled from the Chinese stock market, and the model assessments ultimately suggest that our model is better than the 2005 model of Almgren, Thum, Hauptmann and Li. Notably, the result of a random effect analysis indicates that the parameter α, which is the exponent of the impact function, is a constant, with a value of around 0.7 across all stocks. Our model and empirical results provide academia with some insight into the mechanisms of the Chinese market and can be applied to algorithm trading.

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