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arXiv · 1702.03838

Trading Lightly: Cross-Impact and Optimal Portfolio Execution

Iacopo Mastromatteo·Michael Benzaquen·Zoltan Eisler·Jean-Philippe Bouchaud
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Abstract

We model the impact costs of a strategy that trades a basket of correlated instruments, by extending to the multivariate case the linear propagator model previously used for single instruments. Our specification allows us to calibrate a cost model that is free of arbitrage and price manipulation. We illustrate our results using a pool of US stocks and show that neglecting cross-impact effects leads to an incorrect estimation of the liquidity and suboptimal execution strategies. We show in particular the importance of synchronizing the execution of correlated contracts.

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Iacopo Mastromatteo, Michael Benzaquen, Zoltan Eisler, Jean-Philippe Bouchaud. 2017-02-13. Trading Lightly: Cross-Impact and Optimal Portfolio Execution. https://arxiv.org/abs/1702.03838

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