Trading Strategies for Stock Pairs Regarding to the Cross-Impact Cost

16 Pages Posted: 12 Jan 2017 Last revised: 7 Jul 2017

See all articles by Shanshan Wang

Shanshan Wang

Faculty of Physics, University of Duisburg-Essen

Date Written: January 19, 2017

Abstract

We extend the framework of trading strategies of Gatheral [2010] from single stocks to a pair of stocks. Our trading strategy with the executions of two round-trip trades can be described by the trading rates of the paired stocks and the ratio of their trading periods. By minimizing the potential cost arising from cross-impacts, i.e., the price change of one stock due to the trades of another stock, we can find out an optimal strategy for executing a sequence of trades from different stocks. We further apply the model of the strategy to a specific case, where we quantify the cross-impacts of traded volumes and of time lag with empirical data for the computation of costs. We thus picture the influence of cross-impacts on the trading strategy.

Keywords: econophysics, price impact, market microstructure, optimal execution

JEL Classification: G11, G12, C61, C63

Suggested Citation

Wang, Shanshan, Trading Strategies for Stock Pairs Regarding to the Cross-Impact Cost (January 19, 2017). Available at SSRN: https://ssrn.com/abstract=2897711 or http://dx.doi.org/10.2139/ssrn.2897711

Shanshan Wang (Contact Author)

Faculty of Physics, University of Duisburg-Essen ( email )

Lotharstrasse 1
Duisburg, 47048
Germany

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