Strict universality of the square-root law in price impact across stocks: a complete survey of the Tokyo stock exchange

Abstract

Universal power laws have been scrutinised in physics and beyond, and a long-standing debate exists in econophysics regarding the strict universality of the nonlinear price impact, commonly referred to as the square-root law (SRL). The SRL posits that the average price impact $I$ follows a power law with respect to transaction volume $Q$, such that $I(Q) \propto Q^{\delta}$ with $\delta \approx 1/2$. Some researchers argue that the exponent $\delta$ should be system-specific, without universality. Conversely, others contend that $\delta$ should be exactly $1/2$ for all stocks across all countries, implying universality. However, resolving this debate requires high-precision measurements of $\delta$ with errors of around $0.1$ across hundreds of stocks, which has been extremely challenging due to the scarcity of large microscopic datasets -- those that enable tracking the trading behaviour of all individual accounts. Here we conclusively support the universality hypothesis of the SRL by a complete survey of all trading accounts for all liquid stocks on the Tokyo Stock Exchange (TSE) over eight years. Using this comprehensive microscopic dataset, we show that the exponent $\delta$ is equal to $1/2$ within statistical errors at both the individual stock level and the individual trader level. Additionally, we rejected two prominent models supporting the nonuniversality hypothesis: the Gabaix-Gopikrishnan-Plerou-Stanley and the Farmer-Gerig-Lillo-Waelbroeck models (Nature 2003, QJE 2006, and Quant. Finance 2013). Our work provides exceptionally high-precision evidence for the universality hypothesis in social science and could prove useful in evaluating the price impact by large investors -- an important topic even among practitioners.