Econophysics Master curve for price-impact function

The price reaction to a single transaction depends on transaction volume, the identity of the stock, and possibly many other factors. Here we show that, by taking into account the differences in liquidity for stocks of different size classes of market capitalization, we can rescale both the average...

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Bibliographic Details
Published in:Nature (London) 2003-01, Vol.421 (6919), p.129-130
Main Authors: Mantegna, Rosario N, Lillo, Fabrizio, Farmer, J. Doyne
Format: Article
Language:English
Online Access:Get full text
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Summary:The price reaction to a single transaction depends on transaction volume, the identity of the stock, and possibly many other factors. Here we show that, by taking into account the differences in liquidity for stocks of different size classes of market capitalization, we can rescale both the average price shift and the transaction volume to obtain a uniform price-impact curve for all size classes of firm for four different years (1995-98). This single-curve collapse of the price-impact function suggests that fluctuations from the supply-and-demand equilibrium for many financial assets, differing in economic sectors of activity and market capitalization, are governed by the same statistical rule.
ISSN:0028-0836
1476-4687
DOI:10.1038/421129a