Market impact and its decay (Financial Modeling and Analysis)

Abstract

Most of the price models used in optimal execution literatures focusing on the liquidity risk for institutional investors are given exogenously in consideration of statistical validity. In this study, under the condition that both patient sellers and impatient buyers submit orders with time-homogeneous arrival rates, we characterize the market impact function derived from the endogenous equilibrium price formation model using a one-sided limit order book (LOB), and explain the price model with linear impact and exponential resilience (decay) that is often used in optimal execution problems.