Price impact on term structure
File(s)
Published version
Author(s)
Brigo, Damiano
Graceffa, Federico
Neumann, Eyal
Type
Journal Article
Abstract
We introduce a rst theory of price impact in presence of an interest-rates term
structure. We explain how one can formulate instantaneous and transient price impact
on zero-coupon bonds with di erent maturities, including a cross price impact that is
endogenous to the term structure. We connect the introduced impact to classic noarbitrage theory for interest rate markets, showing that impact can be embedded in the
pricing measure and that no-arbitrage can be preserved. We extend the price impact
setup to coupon-bearing bonds and further show how to implement price impact in a
HJM framework. We present pricing examples in presence of price impact and numerical
examples of how impact changes the shape of the term structure. Finally, we show that
our approach is applicable by solving an optimal execution problem in interest rate
markets with the type of price impact we developed in the paper.
structure. We explain how one can formulate instantaneous and transient price impact
on zero-coupon bonds with di erent maturities, including a cross price impact that is
endogenous to the term structure. We connect the introduced impact to classic noarbitrage theory for interest rate markets, showing that impact can be embedded in the
pricing measure and that no-arbitrage can be preserved. We extend the price impact
setup to coupon-bearing bonds and further show how to implement price impact in a
HJM framework. We present pricing examples in presence of price impact and numerical
examples of how impact changes the shape of the term structure. Finally, we show that
our approach is applicable by solving an optimal execution problem in interest rate
markets with the type of price impact we developed in the paper.
Date Issued
2021-12-07
Date Acceptance
2021-09-13
Citation
Quantitative Finance, 2021, 22 (1), pp.171-195
ISSN
1469-7688
Publisher
Routledge
Start Page
171
End Page
195
Journal / Book Title
Quantitative Finance
Volume
22
Issue
1
Copyright Statement
© 2021 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way.
This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way.
Identifier
https://www.tandfonline.com/doi/full/10.1080/14697688.2021.1983201
Subjects
Social Sciences
Science & Technology
Physical Sciences
Business, Finance
Economics
Mathematics, Interdisciplinary Applications
Social Sciences, Mathematical Methods
Business & Economics
Mathematics
Mathematical Methods In Social Sciences
Price impact
Term structure models
Fixed-income market impact
Cross impact
Impacted risk-neutral measure
Impacted yield curve
Optimal execution
Impacted bond price
Impacted Eurodollar futures price
OPTIMAL PORTFOLIO LIQUIDATION
LINEAR MARKET IMPACT
MULTIPLE
STOCK
q-fin.TR
q-fin.TR
q-fin.PM
Finance
01 Mathematical Sciences
14 Economics
15 Commerce, Management, Tourism and Services
Publication Status
Published
Date Publish Online
2021-12-07