Determinants of immediate price impacts at the trade level in an emerging order-driven market

TL;DR

This paper investigates the microscopic factors influencing immediate price impacts in an emerging order-driven market, highlighting the roles of trade size, liquidity, and order book gaps through regression analysis.

Contribution

It introduces two regression models that quantify how various order book features affect immediate price impacts, revealing new insights into market microstructure dynamics.

Findings

Trade size, bid-ask spread, and order book gaps significantly influence price impacts.

Liquidity at the opposite side of the order book has a stronger effect than same-side liquidity.

Up to 44% of the variation in price impacts can be explained by these factors.

Abstract

The common wisdom argues that, in general, large trades cause large price changes, while small trades cause small price changes. However, for extremely large price changes, the trade size and news play a minor role, while the liquidity (especially price gaps on the limit order book) is a more influencing factor. Hence, there might be other influencing factors of immediate price impacts of trades. In this paper, through mechanical analysis of price variations before and after a trade of arbitrary size, we identify that the trade size, the bid-ask spread, the price gaps and the outstanding volumes at the bid and ask sides of the limit order book have impacts on the changes of prices. We propose two regression models to investigate the influences of these microscopic factors on the price impact of buyer-initiated partially filled trades, seller-initiated partially filled trades, buyer-initiated filled trades, and seller-initiated filled trades. We find that they have quantitatively similar explanation powers and these factors can account for up to 44% of the price impacts. Large trade sizes, wide bid-ask spreads, high liquidity at the same side and low liquidity at the opposite side will cause a large price impact. We also find that the liquidity at the opposite side has a more influencing impact than the liquidity at the same side. Our results shed new lights on the determinants of immediate price impacts.