Dissecting Cross-Impact on Stock Markets: An Empirical Analysis

22 Pages Posted: 10 Sep 2016 Last revised: 3 Nov 2016

See all articles by Michael Benzaquen

Michael Benzaquen

Ecole Polytechnique, Palaiseau; Capital Fund Management

Iacopo Mastromatteo

Capital Fund Management

Zoltan Eisler

Capital Fund Management

Jean-Philippe Bouchaud

Capital Fund Management

Date Written: November 2, 2016

Abstract

The vast majority of recent studies in market impact assess each product individually, and the interactions between their order flows are disregarded. This strong approximation may lead to an underestimation of trading costs and possible contagion effects. Transactions mediate a significant part of the interaction between different instruments. In turn, liquidity shares the sectorial structure of market correlations, which can be encoded as a set of eigenvalues and eigenvectors. We introduce a multivariate linear propagator model that successfully describes such a structure, and reproduces well the response and a significant fraction of the covariance matrix of returns. We explain in detail the various dynamical mechanisms that contribute to these quantities. We also define two simplified models with substantially less parameters to reduce overfitting, and show that they have superior out-of-sample performance.

Keywords: Market impact

Suggested Citation

Benzaquen, Michael and Mastromatteo, Iacopo and Eisler, Zoltan and Bouchaud, Jean-Philippe, Dissecting Cross-Impact on Stock Markets: An Empirical Analysis (November 2, 2016). Available at SSRN: https://ssrn.com/abstract=2836472 or http://dx.doi.org/10.2139/ssrn.2836472

Michael Benzaquen (Contact Author)

Ecole Polytechnique, Palaiseau ( email )

Route de Saclay
Palaiseau, 91128
France

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Iacopo Mastromatteo

Capital Fund Management ( email )

France

Zoltan Eisler

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Jean-Philippe Bouchaud

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

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