Price Impact on Term Structure
Copyright policy )Price Impact on Term Structure
We introduce a first theory of price impact in presence of an interest-rates term structure. We explain how one can formulate instantaneous and transient price impact on bonds with different maturities, including a cross price impact that is endogenous to the term structure. We connect the introduced impact to classic no-arbitrage theory for interest rate markets, showing that impact can be embedded in the pricing measure and that no-arbitrage can be preserved. We present pricing examples in presence of price impact and numerical examples of how impact changes the shape of the term structure. Finally, to show that our approach is applicable we solve an optimal execution problem in interest rate markets with the type of price impact we developed in the paper.
49 pages, 5 figures
Cross impact, 330, Economics, Social Sciences, FOS: Economics and business, Portfolio Management (q-fin.PM), Business & Economics, MULTIPLE, Business, Interdisciplinary Applications, Fixed-income market impact, Tourism and Services, Impacted bond price, 01 Mathematical Sciences, 14 Economics, Quantitative Finance - Portfolio Management, OPTIMAL PORTFOLIO LIQUIDATION, Science & Technology, Quantitative Finance - Trading and Market Microstructure, Price impact, LINEAR MARKET IMPACT, Mathematical Methods, Term structure models, STOCK, Impacted risk-neutral measure, Impacted yield curve, Management, Trading and Market Microstructure (q-fin.TR), q-fin.TR, q-fin.PM, Physical Sciences, Impacted Eurodollar futures price, Optimal execution, Finance, Mathematics, Mathematical Methods In Social Sciences, 15 Commerce
Cross impact, 330, Economics, Social Sciences, FOS: Economics and business, Portfolio Management (q-fin.PM), Business & Economics, MULTIPLE, Business, Interdisciplinary Applications, Fixed-income market impact, Tourism and Services, Impacted bond price, 01 Mathematical Sciences, 14 Economics, Quantitative Finance - Portfolio Management, OPTIMAL PORTFOLIO LIQUIDATION, Science & Technology, Quantitative Finance - Trading and Market Microstructure, Price impact, LINEAR MARKET IMPACT, Mathematical Methods, Term structure models, STOCK, Impacted risk-neutral measure, Impacted yield curve, Management, Trading and Market Microstructure (q-fin.TR), q-fin.TR, q-fin.PM, Physical Sciences, Impacted Eurodollar futures price, Optimal execution, Finance, Mathematics, Mathematical Methods In Social Sciences, 15 Commerce
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