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The amazing power of dimensional analysis: Quantifying market impact

24 November 2017 at 9:01 AM - 11:00 AM

Room 105, Campus on Viale Romania, 32

Speaker: Walter Schachermayer, University of Vienna

A basic problem when trading in financial markets is to analyze the prize movement caused by placing an order. Clearly we expect - ceteris paribus - that placing an order will move the price to the disadvantage of the agent. This price movement is called market impact. 

Following Kyle and Obizhaeva we apply dimensional analysis - a line of arguments wellknown in classical physics - to analyze to which extent the square root law applies. This universal law claims that the market impact is proportional to the square root of the size of the order. 

The mathematical tools of this analysis reside on elementary linear algebra. 

Joint work with Mathias Pohl, Alexander Ristig and Ludovic Tangpi.