RT Journal Article
SR Electronic
T1 Quantifying Long-Term Market Impact
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP jpm.2021.1.324
DO 10.3905/jpm.2021.1.324
A1 Harvey, Campbell R.
A1 Ledford, Anthony
A1 Sciulli, Emidio
A1 Ustinov, Philipp
A1 Zohren, Stefan
YR 2021
UL http://jpm.pm-research.com/content/early/2021/12/28/jpm.2021.1.324.abstract
AB Impact costs occur when large buy or sell orders move market prices. The measurement of these costs is crucial for the evaluation of potential trading strategies and the successful execution of systematic investment strategies. However, common approaches suffer from a type of myopia: impact is only measured for the current transaction. In many cases, orders are correlated, and the impact of the first order will affect the execution of future orders. The authors propose a new measure that quantifies the long-term effects of market impact: expected future flow shortfall (EFFS). Their method is both intuitive and straightforward to implement. Importantly, the EFFS method performs competitively with far more complex and data-hungry approaches. The method should be useful for both the evaluation of execution methods and the sizing of orders.