Market Impact Decay Functions

Market impact decay functions describe how the price distortion caused by a trade dissipates over time after the execution is complete. When a large trade occurs, the price is moved away from its equilibrium, and the market gradually returns to a state of balance as new orders enter the book.

Modeling this decay is important for traders who need to execute multiple related trades, as it helps them understand how long they should wait between transactions to minimize cumulative slippage. These functions are based on empirical observations of market behavior and are vital for fine-tuning algorithmic trading strategies.

They provide a temporal dimension to the study of price impact.