Measuring Market Impact
Several statistical measures exist. The most common and simplest is Kyle's Lambda, defined as the slope from regressing absolute returns to volume over some time window (often as short as 15 minutes). For very short periods, this reduces to simply
Volume is typically measured as turn-over or the value of shares traded, not the number. Under this measure, a highly liquid stock is one that experiences a small price change for a given level of trading volume.
Kyle's lambda is named from Albert Kyle's famous paper on market microstructure.
Measuring market impact is, however, very difficult task and errors in estimating the market impact can highly impact the optimal strategy of trading.
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