The Profitability of Lead-Lag Arbitrage at High-Frequency

Cédric Poutré (), Georges Dionne () and Gabriel Yergeau
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Cédric Poutré: University of Montreal

No 22-5, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

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 d execution-related risks are considered.

Keywords: Lead-lag relationship; High-frequency trading; Statistical arbitrage; Limit order book; Cross-listed stocks; Econometric models. (search for similar items in EconPapers)
JEL-codes: C25 C53 C58 G10 G14 G15 G17 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2022-09-14
New Economics Papers: this item is included in nep-mst
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Related works:
Journal Article: The profitability of lead–lag arbitrage at high frequency (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2022_005

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