Trading Strategies for Stock Pairs Regarding to the Cross-Impact Cost
16 Pages Posted: 12 Jan 2017 Last revised: 7 Jul 2017
Date Written: January 19, 2017
We extend the framework of trading strategies of Gatheral  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: Suggested Citation