Slow decay of impact in equity markets

TL;DR

This paper investigates how the market impact of individual large trades in equity markets diminishes slowly over time, revealing a near-universal decay pattern that can be explained by order flow correlations and trade information.

Contribution

It introduces a method to deconvolve market impact from correlated trades and demonstrates the slow, possibly power-law decay of impact across different equity markets.

Findings

Market impact decays slowly, approaching zero or a small value.

Impact decay can be explained by order-flow auto-correlations and information content.

Impact decay appears to be universal across markets.

Abstract

Using a proprietary dataset of meta-orders and prediction signals, and assuming a quasi-linear impact model, we deconvolve market impact from past correlated trades and a predictable return component to elicit the temporal dependence of the market impact of a single daily meta-order, over a ten day horizon in various equity markets. We find that the impact of single meta-orders is to a first approximation universal and slowly decays to zero (or to a small value), possibly as a power-law. We show that auto-correlated order-flows and trade information contents fully accounts for the apparent plateau observed in the raw data. We discuss the possible bias introduced by the quasi-linear assumption.