Equity Market Impact Modeling: An Empirical Analysis for the Chinese Market

24 Pages Posted: 31 Aug 2018

See all articles by Shiyu Han

Shiyu Han

Peking University - School of Mathematical Sciences

Lan Wu

Peking University

Yuan Cheng

Peking University - School of Mathematical Sciences

Date Written: August 15, 2018

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.

Keywords: market impact model, optimal impact, model assessment, empirical analysis, random effect, Chinese stock market

Suggested Citation

Han, Shiyu and Wu, Lan and Cheng, Yuan, Equity Market Impact Modeling: An Empirical Analysis for the Chinese Market (August 15, 2018). Journal of Risk, Vol. 20, No. 6, 2018, Available at SSRN: https://ssrn.com/abstract=3240565

Shiyu Han

Peking University - School of Mathematical Sciences ( email )

Peking
China

Lan Wu (Contact Author)

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Yuan Cheng

Peking University - School of Mathematical Sciences ( email )

Peking
China

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1
Abstract Views
651
PlumX Metrics