Dissecting cross-impact on stock markets: An empirical analysis

Abstract

The vast majority of market impact studies assess each product individually, and the interactions between the different order flows are disregarded. This strong approximation may lead to an underestimation of trading costs and possible contagion effects. Transactions in fact mediate a significant part of the correlation between different instruments. In turn, liquidity shares the sectorial structure of market correlations, which can be encoded as a set of eigenvalues and eigenvectors. We introduce a multivariate linear propagator model that successfully describes such a structure, and accounts for a significant fraction of the covariance of stock returns. We dissect the various dynamical mechanisms that contribute to the joint dynamics of assets. We also define two simplified models with substantially less parameters in order to reduce overfitting, and show that they have superior out-of-sample performance.

22 pages, 9 figures

References in corpus (1)

• The Epps effect revisited

Cited by in corpus (13)

• A New Attempt to Identify Long-term Precursors for Endogenous Financial Crises in the Market Correlation Structures
• Collective behavior in the North Rhine-Westphalia motorway network
• New Collectivity Measures for Financial Covariances and Correlations
• How spread changes affect the order book: Comparing the price responses of order deletions and placements to trades
• Response functions as a new concept to study local dynamics in traffic networks
• Foreign exchange markets: price response and spread impact
• Comparing the market microstructure between two South African exchanges
• Multivariate Distributions in Non-Stationary Complex Systems I: Random Matrix Model and Formulae for Data Analysis
• Effective Algorithms for Optimal Portfolio Deleveraging Problem with Cross Impact
• A New Traders' Game? -- Empirical Analysis of Response Functions in a Historical Perspective
• Dynamic analysis of influential stocks based on conserved networks
• Spatiotemporal statistical features of velocity responses to traffic congestions in a local motorway network
• Order flow and price formation