Algorithmic Trading Methods, 2nd Edition

Chapter 4: Market Impact Models

Introduction

This chapter provides an overview of market impact models with an emphasis on the “Almgren and Chriss” (AC) and “I-Star” models. The AC model, introduced by Robert Almgren and Neil Chriss (1997), is a path-dependent approach that estimates costs for an entire order based on the sequence of traders. This is referred to as a bottom-up approach because the cost for the entire order is determined from the actual sequence of trades.

The I-Star model, introduced by Robert Kissell and Roberto Malamut (1998), is a top-down cost allocation approach. First, we calculate the cost of the entire order, and then allocate to trade periods based on the actual trade schedule (trade trajectory). The preferred ...