Price Impact on Term Structure

Abstract

We introduce a first theory of price impact in presence of an interest-rates term structure. We explain how one can formulate instantaneous and transient price impact on bonds with different maturities, including a cross price impact that is endogenous to the term structure. We connect the introduced impact to classic no-arbitrage theory for interest rate markets, showing that impact can be embedded in the pricing measure and that no-arbitrage can be preserved. We present pricing examples in presence of price impact and numerical examples of how impact changes the shape of the term structure. Finally, to show that our approach is applicable we solve an optimal execution problem in interest rate markets with the type of price impact we developed in the paper.

Derivatives under market impact: Disentangling cost and information

“…Cetin et al (2006) and Cetin et al (2010) have also interpreted the permanent market impact through the concept of asset's supply curve. Another recent work by Brigo et al (2020) studies the arbitrage pricing theory for the bond market in the presence of market impact. Our imperative standpoint is that the price impact of some information in the market is more pertinent than the nature of the information itself.…”