Market impact, leverage, systemic risk and the perils of mark-to-market accounting

Doyne Farmer, University of Oxford

Market impact refers to the price change associated with the introduction of new buy or sell orders into the market; it offers a useful alternative to the traditional supply and demand framework for several reasons, the most important being the theoretical and empirical evidence that it follows a universal law. In this lecture, Doyne Farmer explains how understanding market impact is essential for regulating investment size and optimizing execution tactics, and how it provides a valuable tool for understanding market ecology and systemic risk.

Instabilities in Financial Markets | Symposium for the 202nd Anniversary of the Founding Decree of the Scuola Normale Superiore | October 19, 2012 | Sala Azzurra