Determinants of the Price Impact
Lookingattheevidence,thevariablesthatdeterminetheprice
impactoftradingseemtobethesamevariablesthatdrivethe
bid-askspread.Thatshouldnotbesurprising.Boththeprice
impactandthebid-askspreadarefunctionsoftheliquidityof
the market. The inventory costs and adverse selection
problemsarelikelytobelargestforstockswheresmalltrades
can move the market significantly.
Breen, Hodrick, and Korajczyk (2000) studied both the
magnitudeofthepriceimpactanditsdeterminantsbylooking
at stocks listed on U.S. exchanges.
18 Theyfindthatincreasingtheturnoverby0.1percentina
five-minuteintervalcancreateapriceimpactof2.65percent
for NYSE and AMEX firms and about 1.85 percent for
NASDAQstocks.Comparingthepriceimpactacrossfirms,
they find evidence of the following:
1.Thepriceimpactofatradeofagivennumberofsharesis
smaller forlarger marketcapfirms thanforsmaller firms.
However,thepriceimpactofatradeofthesamepercentage
magnitude(asapercentofmarketcap)isgreaterforlarger
market cap firms than for smaller firms.
2.Thepriceimpactofatradeissmallerforfirmswithhigh
tradingvolumeinthepreviousquarterandforfirmsthathave
positivemomentum(i.e.,stockpricehasgoneupinthesix
months prior to the trade).
3.Thepriceimpactofatradeissmallerforfirmswithhigh
institutionalholdings(asapercentofoutstandingstock)than
for a firm with lower institutional holdings.