Price Impact

Understand

We define what "Price Impact" means, and how it is measured and modelled in the recent literature.

• Although this notion seems to convey the idea of a forceful and intuitive mechanism, we discuss why things might not be that simple.
• Empirical studies show that while the correlation between signed order flow and price changes is strong, the impact of trades on prices is neither linear in volume nor permanent.
• Impact allows private information to be reflected in prices, but by the same token, random fluctuations in order flow must also contribute to the volatility of markets.