Markets: A Rigorous Course

M05 · Problem 8 ★★ Check

Square-root impact, capacity and splitting

A stock has VD=20V_D = 20 lakh shares and σD=1.5%\sigma_D = 1.5\%; take Y=0.8Y = 0.8 in (5.13). (a) Compute the predicted impact in bp for metaorders of 10,000, 50,000, 1 lakh and 2 lakh shares. (b) A strategy's gross edge per trade is 30 bp. Ignoring other costs, at what order size does impact consume the edge? (c) Compare executing QQ in one day with executing Q/2Q/2 on each of two days (same VDV_D, σD\sigma_D, and assuming impact fully decays overnight). What fraction of the impact cost is saved, and what risk is added?

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