Nonlinear Price Impact and Order-Flow Balance Across Intraday Scales

Summary

This research examines how aggregated trade flow relates to price changes across intraday time scales. It reports that price impact follows a nonlinear pattern that is broadly similar across instruments, while the specific curves differ between trade-volume impact and trade-sign impact. The scaling behavior is linked largely to the relevant Hurst exponents.

The reported analysis also finds that extreme order-sign imbalance does not correspond to large returns. Instead, the mid-price is more likely to remain pinned when order flow is strongly one-sided, and the probability of a trade moving the mid-price declines as sign bias grows. The authors interpret price movement as requiring a sufficient balance in local order flow. These findings challenge assumptions of linear aggregate impact and point to an important role for correlated liquidity taking and provision. The excerpt gives no sample details, estimation procedures, or robustness tests, so the results' scope beyond the reported markets and scales cannot be assessed.

Key ideas

• Aggregate price impact is nonlinear across the intraday scales examined.
• Impact curves differ between order volume and order sign, while varying little across instruments.
• The scaling behavior is largely associated with relevant Hurst exponents.
• Strong order-sign imbalance is associated with a pinned mid-price rather than large returns.
• The probability that a trade moves the mid-price declines as order-sign bias increases.

Tags

# Universal scaling and nonlinearity of aggregate price impact in financial markets


# Universal scaling and nonlinearity of aggregate price impact in financial markets









How and why stock prices move is a centuries-old question still not answered conclusively. More recently, attention shifted to higher frequencies, where trades are processed piecewise across different timescales. Here we reveal that price impact has a universal non-linear shape for trades aggregated on any intra-day scale. Its shape varies little across instruments, but drastically different master curves are obtained for order-volume and -sign impact. The scaling is largely determined by the relevant Hurst exponents. We further show that extreme order flow imbalance is not associated with large returns. To the contrary, it is observed when the price is "pinned" to a particular level. Prices move only when there is sufficient balance in the local order flow. In fact, the probability that a trade changes the mid-price falls to zero with increasing (absolute) order-sign bias along an arc-shaped curve for all intra-day scales. Our findings challenge the widespread assumption of linear aggregate impact. They imply that market dynamics on all intra-day timescales are shaped by correlations and bilateral adaptation in the flows of liquidity provision and taking.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.