hard · Market Microstructure
According to the Almgren-Chriss framework, the total price impact of a trade is decomposed into permanent and temporary components.
If a trader utilizes a linear impact model where the permanent impact is g(n) = γ n and the temporary impact is h(n) = η (n/τ), which statement correctly identifies the economic interpretation of the permanent component?
- It accounts for the bid-ask bounce observed between successive transactions in a random walk.
- It is the price concession required to induce immediate liquidity provision from the order book.
- It is the cost resulting from the delay between the investment decision and the start of execution.
- It represents the information content of the trade that persists after liquidity providers have recovered.
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