Immediate price impact of a stock and its warrant: Power-law or logarithmic model?

TL;DR

This paper compares power-law and logarithmic models to estimate the immediate price impact of stock and warrant trades, finding the power-law model significantly more accurate and robust, with implications for optimal trade execution.

Contribution

It introduces a comparative analysis of power-law and logarithmic models for price impact estimation, demonstrating the superiority of the power-law model based on empirical data.

Findings

Power-law model outperforms logarithmic model in robustness and accuracy.

Ask and bid order impacts are positively correlated for filled trades.

Results offer insights for improving trade execution strategies.

Abstract

Based on the order flow data of a stock and its warrant, the immediate price impacts of market orders are estimated by two competitive models, the power-law model (PL model) and the logarithmic model (LG model). We find that the PL model is overwhelmingly superior to the LG model, regarding the robustness of the estimated parameters and the accuracy of out-of-sample forecasting. We also find that the price impacts of ask and bid orders are consistent with each other for filled trades, since significant positive correlations are observed between the model parameters of both types of orders. Our findings may provide valuable insights for optimal trade execution.