The amazing power of dimensional analysis: Quantifying market impact

Mathias Pohl, Alexander Ristig, Walter Schachermayer and Ludovic Tangpi

Papers from arXiv.org

Abstract: This note complements the inspiring work on dimensional analysis and market microstructure by Kyle and Obizhaeva [18]. Following closely these authors, our main result shows by a similar argument as usually applied in physics the following remarkable fact. If the market impact of a meta-order only depends on four well-defined and financially meaningful variables, then -- up to a constant -- there is only one possible form of this dependence. In particular, the market impact is proportional to the square-root of the size of the meta-order. This theorem can be regarded as a special case of a more general result of Kyle and Obizhaeva. These authors consider five variables which might have an influence on the size of the market impact. In this case one finds a richer variety of possible functional relations which we precisely characterize. We also discuss the analogies to classical arguments from physics, such as the period of a pendulum.

Date: 2017-02, Revised 2017-09
New Economics Papers: this item is included in nep-mst
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