Cross impact in derivative markets

Mehdi Tomas, Iacopo Mastromatteo and Michael Benzaquen ()
Additional contact information
Mehdi Tomas: LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique, CMAP - Centre de Mathématiques Appliquées de l'Ecole polytechnique - Inria - Institut National de Recherche en Informatique et en Automatique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Iacopo Mastromatteo: Auteur indépendant
Michael Benzaquen: LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique

Post-Print from HAL

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.

Date: 2023
New Economics Papers: this item is included in nep-fmk and nep-mst
Note: View the original document on HAL open archive server: https://hal.science/hal-03378903v1
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Wilmott Journal, 2023, 123, pp.16-28

Downloads: (external link)
https://hal.science/hal-03378903v1/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03378903

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().