Cross Impact in Derivative Markets

17 Pages Posted: 18 Feb 2021

See all articles by Mehdi Tomas

Mehdi Tomas

Ecole Polytechnique

Iacopo Mastromatteo

Capital Fund Management

Michael Benzaquen

Ecole Polytechnique, Palaiseau; Capital Fund Management

Date Written: February 4, 2021

Abstract

We introduce a linear cross-impact framework in a setting in which the price of some given financial instruments (derivatives) is a deterministic function of one or more, possibly tradeable, stochastic factors (underlying). We show that a particular cross-impact model, the multivariate Kyle model, prevents arbitrage and aggregates (potentially non-stationary) traded order flows on derivatives into (roughly stationary) liquidity pools aggregating order flows traded on both derivatives and underlying. Using E-Mini futures and options along with VIX futures, we provide empirical evidence that the price formation process from order flows on derivatives is driven by cross-impact and confirm that the simple Kyle cross-impact model is successful at capturing parsimoniously such empirical phenomenology. Our framework may be used in practice for estimating execution costs, in particular hedging costs.

Suggested Citation

Tomas, Mehdi and Mastromatteo, Iacopo and Benzaquen, Michael, Cross Impact in Derivative Markets (February 4, 2021). Available at SSRN: https://ssrn.com/abstract=3779461 or http://dx.doi.org/10.2139/ssrn.3779461

Mehdi Tomas (Contact Author)

Ecole Polytechnique ( email )

Route de Saclay
Palaiseau, 91128
France

Iacopo Mastromatteo

Capital Fund Management ( email )

France

Michael Benzaquen

Ecole Polytechnique, Palaiseau ( email )

Route de Saclay
Palaiseau, 91128
France

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
147
Abstract Views
588
rank
246,523
PlumX Metrics