When is cross impact relevant?

Victor Le Coz, Iacopo Mastromatteo, Damien Challet and Michael Benzaquen

Quantitative Finance, 2024, vol. 24, issue 2, 265-279

Abstract: Trading pressure from one asset can move the price of another, a phenomenon referred to as cross impact. Using tick-by-tick data spanning 5 years for 500 assets listed in the United States, we identify the features that make cross-impact relevant to explain the variance of price returns. We show that price formation occurs endogenously within highly liquid assets. Then, trades in these assets influence the prices of less liquid correlated products, with an impact velocity constrained by their minimum trading frequency. We investigate the implications of such multidimensional price formation mechanism on interest rate markets. We find that the 10-year bond future serves as the primary liquidity reservoir, influencing the prices of cash bonds and futures contracts within the interest rate curve. Such behaviour challenges the validity of the theory in Financial Economics that regards long-term rates as agents anticipations of future short term rates.

Date: 2024
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Working Paper: When is cross impact relevant? (2024)
Working Paper: When is cross impact relevant? (2024)
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DOI: 10.1080/14697688.2024.2302827

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