The Profitability of Lead-Lag Arbitrage at High-Frequency

53 Pages Posted: 30 Sep 2022

See all articles by Cédric Poutré

Cédric Poutré

University of Montreal - Department of Mathematics and Statistics

Georges Dionne

HEC Montreal - Department of Finance

gabriel yergeau

HEC Montréal,

Date Written: September 26, 2022

Abstract

Any lead-lag effect in an asset pair implies the future returns on the lagging asset have the potential to be predicted from past and present prices of the leader, thus creating statistical arbitrage opportunities. We utilize robust lead-lag indicators to uncover the origin of price discovery and we propose an econometric model exploiting that effect with level 1 data of limit order books (LOB). We also develop a high-frequency trading strategy based on the model predictions to capture arbitrage opportunities. The framework is then evaluated on six months of DAX 30 cross-listed stocks’ LOB data obtained from three European exchanges in 2013: Xetra, Chi-X, and BATS. We show that a high-frequency trader can profit from lead-lag relationships because of predictability, even when trading costs, latency, and execution-related risks are considered.

Keywords: Lead-lag relationship, High-frequency trading, Statistical arbitrage, Limit order book, Cross-listed stocks, Econometric models.

JEL Classification: C25, C53, C58, G10, G14, G15, G17.

Suggested Citation

Poutré, Cédric and Dionne, Georges and yergeau, gabriel, The Profitability of Lead-Lag Arbitrage at High-Frequency (September 26, 2022). Available at SSRN: https://ssrn.com/abstract=4223813 or http://dx.doi.org/10.2139/ssrn.4223813

Cédric Poutré

University of Montreal - Department of Mathematics and Statistics ( email )

C.P. 6128, succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

HOME PAGE: http://dms.umontreal.ca

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Gabriel Yergeau

HEC Montréal,

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