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Measuring the Market Impact of Large Trades in United States Equities
Jan 2, 2006
The Barra Market Impact Model forecasts the price impact of large trades for a typical investor by examining the role of liquidity providers and the effect of their inventory levels on determining asset prices in the short term.
In this paper we examine the performance of the Market Impact Model during six months in 2005. We present results for a range of different capitalisations and show how the model performs when required to forecast costs for trades executed with lags of up to 10 days. For investors who trade at specific times of the day, we demonstrate that whilst observed impact varies over the course of the day, this pattern is consistent over time. Thus our results provide guidance on how to adjust forecasts for investors who execute their trades at specific times of the day.
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