Kernel Market Impact Analysis in China A-Share Markets

Abstract

With transaction-level market data for stocks in China A-share markets, the authors construct individual stocks’ kernel functions of market impact and analyze their statistical properties. Attribution analysis of such kernel functions is also performed to understand how market microstructure variables such as bid–ask spread and liquidity distribution in order books can be used to classify different groups of kernel functions. The authors’ analysis shows that stocks in China A-share markets exhibit clear patterns of market impact curves, which is likely due to specific market structure regulations such as constant tick size across different stocks and stock-specific order book dynamics resulting from market participants’ behaviors. The authors also explore the application of kernel functions in forecasting price movement in close-to-reality trading simulators that consider market impact costs at individual trade level.