costestim - Direct Estimation of Equity Market Impact *...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Direct Estimation of Equity Market Impact * Robert Almgren , Chee Thum , Emmanuel Hauptmann , and Hong Li May 10, 2005 Abstract The impact of large trades on market prices is a widely discussed but rarely measured phenomenon, of essential importance to sell- and buy-side participants. We analyse a large data set from the Citigroup US equity trading desks, using a simple but realistic the- oretical framework. We fit the model across a wide range of stocks, determining the dependence of the coefficients on parameters such as volatility, average daily volume, and turnover. We reject the com- mon square-root model for temporary impact as function of trade rate, in favor of a 3/5 power law across the range of order sizes considered. Our results can be directly incorporated into optimal trade scheduling algorithms and pre- and post-trade cost estima- tion. * We are grateful to Stavros Siokos of Citigroup Equity Trading Strategy and to Neil Chriss of SAC Capital Management for helpful feedback and perspective. University of Toronto Departments of Mathematics and Computer Science, and Citigroup Global Quantitative Research; Robert.Almgren@utoronto.ca . Citigroup Global Quantitative Research, New York and London. Original version December 20, 2004 1 Equity Market Impact May 10, 2005 2 Contents 1 Introduction 3 2 Data 5 2.1 Description and filters . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3 Trajectory Cost Model 13 3.1 Permanent and temporary impact . . . . . . . . . . . . . . . . 14 3.2 Choice of functional form . . . . . . . . . . . . . . . . . . . . . 16 4 Cross-Sectional Description 17 4.1 Parameter scaling . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.2 Model determination . . . . . . . . . . . . . . . . . . . . . . . . 18 4.3 Determination of coefficients . . . . . . . . . . . . . . . . . . . 20 4.4 Residual analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5 Summary 24 References 26 Equity Market Impact May 10, 2005 3 1 Introduction Transaction costs are widely recognized as a large determinant of invest- ment performance (see, for example, Freyre-Sanders, Guobuzaite, and Byrne (2004)). Not only do they affect the realized results of an active investment strategy, but they also control how rapidly assets can be con- verted into cash should the need arise. Such costs generally fall into two categories: Direct costs are commissions and fees that are explicitly stated and easily measured. These are important and should be minimized, but are not the focus of this paper. Indirect costs are costs that are not explicitly stated. For large trades, the most important component of these is the impact of the traders own actions on the market. These costs are notoriously dif- ficult to measure, but they are the most amenable to improvement by careful trade management and execution....
View Full Document

This note was uploaded on 12/08/2011 for the course CIS 625 taught by Professor Michaelkearns during the Spring '12 term at Pennsylvania State University, University Park.

Page1 / 26

costestim - Direct Estimation of Equity Market Impact *...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online