Transaction Costs & Market Impact: Models & Analysis › Key Parameters
Michael BrenndoerferJanuary 8, 20261 min read
Quantitative FinanceAll chapters Part 14 of 15Strategy Development and Backtesting
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The key parameters for market impact models are:
- ̒ (Sigma): Daily volatility of the asset. Higher volatility implies higher risk for liquidity providers, resulting in larger spreads and impact costs.
- (Volume): Average daily trading volume. This normalizes the trade size; the same dollar trade has less impact in a high-volume stock.
- ̑ (Eta): Impact coefficient. A market-specific parameter scaling the overall cost (typically 0.1 to 0.3).
- ̓ (Gamma): Impact exponent. In the square-root model, , indicating that impact costs increase with the square root of trade size.
- ̒ (Lambda): Risk aversion parameter (Almgren-Chriss). Determines the optimal trading speed by balancing impact cost (slow trading) against volatility risk (fast trading).