Trading with Concave Price Impact and Impact Decay—Theory and Evidence

We study statistical arbitrage problems accounting for the nonlinear and transient price impact of metaorders observed empirically. We show that simple explicit trading rules can be derived even for general nonparametric alpha and liquidity signals and also discuss extensions to several impact decay timescales. These results are illustrated using a proprietary data set of Capital Fund Management metaorders, which allows us to calibrate the levels, concavity, and decay parameters of the price impact model and analyze their effects on optimal trading.

Supplemental Material: All supplemental materials, including the code, data, and files required to reproduce the results, are available at https://doi.org/https://doi.org/10.1287/opre.2023.0620.