Evidence on the Decay of Temporary Market Impact
Summary
The document responds to a request for research on how long temporary price impact persists after trading. It lists studies using different datasets: cash trades, hedge-fund investment decisions, and institutional order decisions. The cited work is summarized as finding two decay horizons for temporary impact, one rapid and intraday and another extending over multiple days. It also distinguishes this temporary component from price movement associated with the underlying investment decision.
The answer cautions that this distinction does not imply aggregate buying pressure is irrelevant: the combined actions of many participants may influence prices. It suggests limit order book resiliency as another way to study recovery after trading. The text provides references and a synthesis, but no descriptions of each paper’s model, estimation procedure, sample coverage, or uncertainty. Its broad claims should therefore be checked against the original studies before using the stated decay pattern in transaction-cost analysis or execution design.
Key ideas
- The cited studies examine temporary market impact using several types of trade and investor-decision data.
- The answer describes both fast intraday and slower multiday decay in temporary impact.
- It separates temporary impact from price movement related to an investment decision.
- The findings about an isolated trader do not rule out price effects from cumulative market-wide pressure.
- Limit order book resiliency is offered as another measure relevant to impact recovery.
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Full text
# Papers on temporary price impact # Papers on temporary price impact Can anyone recommend papers that model how long temporary price impact last when you buy / sell a trade? This would fall under the TCA realm (Trade Cost Analysis). Thank you. ## Answer by lehalle (score 4, accepted) https://quant.stackexchange.com/a/29784 The reference papers for market impact decay are: - Waelbroeck, H., and Gomes, C. (2013). Is market impact a measure of the information value of trades? market response to liquidity vs. informed trades. Social Science Research Network Working Paper Series. URL http://ssrn.com/abstract=2291720 - Brokmann, X., Serie, E., Kockelkoren, J., and Bouchaud, J. P. (2014). Slow decay of impact in equity markets. URL http://arxiv.org/abs/1407.3390 - Bacry, E., Iuga, A., Lasnier, M., and L. (2015). Market impacts and the life cycle of investors orders. Market Microstructure and Liquidity, 1 (2). URL http://ssrn.com/abstract=2532152 The first one uses a database of "cash trades" (ie trade with no specific decision investment), the second one uses a database of the decisions of an hedge fund, and the third one uses a database of institutional decisions. They have the same conclusions: - permanent impact is linked to the investment decision: if you decided to buy to invest and you are a good portfolio manager, the price will ultimately go up. It is not really linked to your impact (even if you would not have traded, the price will have gone up). - temporary impact decay has two scales: a fast intraday one, and a slow (12 to 20 days) one. This impact reverts to zero. Point (1) does not mean permanent impact is fully independent from buying / selling pressure. It can come from the cumulative pressure of all participants, it is a mean field effect: these three papers just say an isolated investor / trader cannot move permanently the price. If you are not convinced by the upper three papers, you can have a look at this one: - Koudijs, P. (2013). 'those who know most': Insider trading in 18th c. amsterdam. Journal of Political Economy, 123 (6), 1356-1409. URL http://dx.doi.org/10.3386/w18845 It identifies market impact and decay on trades from the XVIIIth century on Amsterdam stock exchange! ## Answer by M. Jeunesse (score 0) https://quant.stackexchange.com/a/27744 You might want to measure the resiliency of a limit order book. http://users.iems.northwestern.edu/~armbruster/2007msande444/large-06.pdf https://hal.archives-ouvertes.fr/hal-00166969/PDF/OE19.pdf
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