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Trading strategies for stock pairs regarding to the cross-impact cost

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  • Shanshan Wang

Abstract

We extend the framework of trading strategies of Gatheral [2010] from single stocks to a pair of stocks. Our trading strategy with the executions of two round-trip trades can be described by the trading rates of the paired stocks and the ratio of their trading periods. By minimizing the potential cost arising from cross-impacts, i.e., the price change of one stock due to the trades of another stock, we can find out an optimal strategy for executing a sequence of trades from different stocks. We further apply the model of the strategy to a specific case, where we quantify the cross-impacts of traded volumes and of time lag with empirical data for the computation of costs. We thus picture the influence of cross-impacts on the trading strategy.

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  • Shanshan Wang, 2017. "Trading strategies for stock pairs regarding to the cross-impact cost," Papers 1701.03098, arXiv.org, revised Jul 2017.
    • Handle: RePEc:arx:papers:1701.03098
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    References listed on IDEAS

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    Cited by:

    1. Henao-Londono, Juan C. & Guhr, Thomas, 2022. "Foreign exchange markets: Price response and spread impact," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 589(C).
    2. Victor Le Coz & Iacopo Mastromatteo & Damien Challet & Michael Benzaquen, 2023. "When is cross impact relevant?," Working Papers hal-04234766, HAL.
    3. Juan C. Henao-Londono & Sebastian M. Krause & Thomas Guhr, 2021. "Price response functions and spread impact in correlated financial markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 94(4), pages 1-20, April.

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