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Strategic Cross-Trading in the U.S. Stock Market

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  • Paolo Pasquariello
  • Clara Vega

Abstract

We model and test for the role of heterogeneously informed, strategic multi-asset speculation for cross-price impact—the impact of trades in one asset on the prices of other (even unrelated) assets—in the U.S. stock market. Our investigation of the trading activity in New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotation System (NASDAQ) stocks between 1993 and 2004 reveals that, consistent with our model, (1) daily order imbalance in one industry or random stock has a significant, persistent, and robust impact on daily returns of other (even unrelated) industries or random stocks; (2) cross-price impact is often negative; and (3) both direct (i.e., an asset’s own) and absolute (i.e., unsigned) cross-price impact are smaller when speculators are more numerous, greater when market-wide dispersion of beliefs is higher, and greater among stocks dealt by the same specialist.

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  • Paolo Pasquariello & Clara Vega, 2015. "Strategic Cross-Trading in the U.S. Stock Market," Review of Finance, European Finance Association, vol. 19(1), pages 229-282.
    • Handle: RePEc:oup:revfin:v:19:y:2015:i:1:p:229-282.
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    Cited by:

    1. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2020. "How to build a cross-impact model from first principles: Theoretical requirements and empirical results," Papers 2004.01624, arXiv.org, revised Mar 2022.
    2. Thierry Foucault & Laurent Fresard, 2019. "Corporate Strategy, Conformism, and the Stock Market," The Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 905-950.
    3. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2022. "Cross impact in derivative markets," Post-Print hal-03378903, HAL.
    4. Gerry Tsoukalas & Jiang Wang & Kay Giesecke, 2019. "Dynamic Portfolio Execution," Management Science, INFORMS, vol. 67(5), pages 2015-2040, May.
    5. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2022. "How to build a cross-impact model from first principles: Theoretical requirements and empirical results," Post-Print hal-02567489, HAL.
    6. Zhou, Shengjie & Ye, Qing, 2023. "Margin trading and spillover effects: Evidence from the Chinese stock markets," Emerging Markets Review, Elsevier, vol. 54(C).
    7. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2021. "Cross impact in derivative markets," Working Papers hal-03378903, HAL.
    8. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2021. "Cross impact in derivative markets," Papers 2102.02834, arXiv.org, revised Mar 2022.
    9. Danjue Clancey-Shang, 2022. "Information Spillovers Prior to M&A Announcements," JRFM, MDPI, vol. 15(10), pages 1-21, October.
    10. Antón, Miguel & Mayordomo, Sergio & Rodríguez‐Moreno, María, 2018. "Dealing with dealers: Sovereign CDS comovements," Journal of Banking & Finance, Elsevier, vol. 90(C), pages 96-112.
    11. Yamani, Ehab, 2023. "Return–volume nexus in financial markets: A survey of research," Research in International Business and Finance, Elsevier, vol. 65(C).
    12. Rama Cont & Mihai Cucuringu & Chao Zhang, 2021. "Cross-Impact of Order Flow Imbalance in Equity Markets," Papers 2112.13213, arXiv.org, revised Jun 2023.
    13. Gerig, Austin & Michayluk, David, 2017. "Automated liquidity provision," Pacific-Basin Finance Journal, Elsevier, vol. 45(C), pages 1-13.
    14. Mathieu Rosenbaum & Mehdi Tomas, 2021. "A characterisation of cross-impact kernels," Papers 2107.08684, arXiv.org.
    15. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2020. "How to build a cross-impact model from first principles: Theoretical requirements and empirical results," Working Papers hal-02567489, HAL.
    16. Yutong Lu & Gesine Reinert & Mihai Cucuringu, 2023. "Co-trading networks for modeling dynamic interdependency structures and estimating high-dimensional covariances in US equity markets," Papers 2302.09382, arXiv.org.
    17. Jasdeep Kalsi & Terry Lyons & Imanol Perez Arribas, 2019. "Optimal execution with rough path signatures," Papers 1905.00728, arXiv.org.
    18. Shreya Bose & Ibrahim Ekren, 2021. "Multidimensional Kyle-Back model with a risk averse informed trader," Papers 2111.01957, arXiv.org.
    19. Tantisantiwong, Nongnuch & Halari, Anwar & Helliar, Christine & Power, David, 2018. "East meets West: When the Islamic and Gregorian calendars coincide," The British Accounting Review, Elsevier, vol. 50(4), pages 402-424.

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