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Cross impact in derivative markets

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.
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Preprints, Working Papers, ...
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https://hal.archives-ouvertes.fr/hal-03378903
Contributor : Michael Benzaquen Connect in order to contact the contributor
Submitted on : Thursday, October 14, 2021 - 5:24:44 PM
Last modification on : Tuesday, October 26, 2021 - 4:00:36 AM
Long-term archiving on: : Saturday, January 15, 2022 - 7:52:22 PM

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Tomas2021.pdf
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  • HAL Id : hal-03378903, version 1
  • ARXIV : 2102.02834

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Mehdi Tomas, Iacopo Mastromatteo, Michael Benzaquen. Cross impact in derivative markets. 2021. ⟨hal-03378903⟩

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