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Econophysics

Master curve for price-impact function

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Abstract

The price reaction to a single transaction depends on transaction volume, the identity of the stock, and possibly many other factors. Here we show that, by taking into account the differences in liquidity for stocks of different size classes of market capitalization, we can rescale both the average price shift and the transaction volume to obtain a uniform price-impact curve for all size classes of firm for four different years (1995–98). This single-curve collapse of the price-impact function suggests that fluctuations from the supply-and-demand equilibrium for many financial assets, differing in economic sectors of activity and market capitalization, are governed by the same statistical rule.

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Figure 1: Scaling of the price-impact curves of 1,000 stocks traded on the New York Stock Exchange.

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Author information

Authors and Affiliations

  1. Istituto Nazionale per la Fisica della Materia, Università di Palermo, Palermo, 90128, Italy

    Fabrizio Lillo & Rosario N. Mantegna

  2. Santa Fe Institute, Santa Fe, 87501, New Mexico, USA

    J. Doyne Farmer

  3. Dipartimento di Fisica e Tecnologie Relative, Università di Palermo, Palermo, 90128, Italy

    Rosario N. Mantegna

Authors
  1. Fabrizio Lillo
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  2. J. Doyne Farmer
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  3. Rosario N. Mantegna
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Corresponding author

Correspondence to Rosario N. Mantegna.

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The authors declare no competing financial interests.

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Lillo, F., Farmer, J. & Mantegna, R. Master curve for price-impact function. Nature 421, 129–130 (2003). https://doi.org/10.1038/421129a

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