Cross-impact and no-dynamic-arbitrage
Michael Schneider and
Quantitative Finance, 2019, vol. 19, issue 1, 137-154
We extend the ‘No-dynamic-arbitrage and market impact’-framework of Gatheral [Quant. Finance, 2010, 10(7), 749–759] to the multi-dimensional case where trading in one asset has a cross-impact on the price of other assets. From the condition of absence of dynamical arbitrage we derive theoretical limits for the size and form of cross-impact that can be directly verified on data. For bounded decay kernels we find that cross-impact must be an odd and linear function of trading intensity and cross-impact from asset i to asset j must be equal to the one from j to i. To test these constraints we estimate cross-impact among sovereign bonds traded on the electronic platform MOT. While we find significant violations of the above symmetry condition of cross-impact, we show that these are not arbitrageable with simple strategies because of the presence of the bid-ask spread.
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Working Paper: Cross-impact and no-dynamic-arbitrage (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:19:y:2019:i:1:p:137-154
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