Markets never forget: the lasting impression of square-root impact

Inelasticity and illiquidity prolong the effects of flows; risk management needs to take this into account

How should we characterise market impact? For practitioners, it’s an obstacle that considerably increases the cost of trading. For most financial economists, however, it’s a short-lived effect that has little economic relevance in the longer term.

Yet recent research – both theoretical and empirical – suggests this is not the case. It shows that impact is no second-order nuisance. Rather, it is a