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Cross impact in derivative markets

Author

Listed:
  • Mehdi Tomas
  • Iacopo Mastromatteo
  • Michael Benzaquen

Abstract

Trading a financial asset pushes its price as well as the prices of other assets, a phenomenon known as cross-impact. The empirical estimation of this effect on complex financial instruments, such as derivatives, is an open problem. To address this, we consider a setting in which the prices of derivatives is a deterministic function of stochastic factors where trades on both factors and derivatives induce price impact. We show that a specific cross-impact model satisfies key properties which make its estimation tractable in applications. Using E-Mini futures, European call and put options and VIX futures, we estimate cross-impact and show our simple framework successfully captures some of the empirical phenomenology. Our framework for estimating cross-impact on derivatives may be used in practice for estimating hedging costs or building liquidity metrics on derivative markets.

Suggested Citation

  • Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2021. "Cross impact in derivative markets," Papers 2102.02834, arXiv.org, revised Mar 2022.
    • Handle: RePEc:arx:papers:2102.02834
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    References listed on IDEAS

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