Problem bank

Problem 176 of 333HardFinanceP176

Square-root impact law

  1. Empirical market impact roughly follows ΔP/σ≈Y×Q/V\Delta P/\sigma \approx Y \times \sqrt{Q/V} where QQ is order size, VV is daily volume, σ\sigma is volatility, YY a constant. Why might impact scale as Q/V\sqrt{Q/V} rather than linearly?