In this article we will sharpen our understanding of cost modeling as we discuss the motivation behind constructing the Market Impact Model and the challenges presented by the task. We will describe the underlying economic structure of equity trading as it relates to the creation of market impact transaction costs. We apply economic reasoning and empirical data analysis to establish the framework of the calculation of a priori estimates of trading costs covering a wide range of assets and position sizes. We also discuss a wide variety of tests, from simple to complex, which may be made to explore how well the model actually works.
Publication: Research Insights
Authors: FERRARI Mark, TORRE Nicolo
