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Cross-impact of order flow imbalance in equity markets

Author

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  • Rama Cont
  • Mihai Cucuringu
  • Chao Zhang

Abstract

We investigate the impact of order flow imbalance (OFI) on price movements in equity markets in a multi-asset setting. First, we propose a systematic approach for combining OFIs at the top levels of the limit order book into an integrated OFI variable which better explains price impact, compared to the best-level OFI. We show that once the information from multiple levels is integrated into OFI, multi-asset models with cross-impact do not provide additional explanatory power for contemporaneous impact compared to a sparse model without cross-impact terms. On the other hand, we show that lagged cross-asset OFIs do improve the forecasting of future returns. We also establish that this lagged cross-impact mainly manifests at short-term horizons and decays rapidly in time.

Suggested Citation

  • Rama Cont & Mihai Cucuringu & Chao Zhang, 2023. "Cross-impact of order flow imbalance in equity markets," Quantitative Finance, Taylor & Francis Journals, vol. 23(10), pages 1373-1393, October.
    • Handle: RePEc:taf:quantf:v:23:y:2023:i:10:p:1373-1393
    DOI: 10.1080/14697688.2023.2236159
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    Cited by:

    1. Eduardo Abi Jaber & Eyal Neuman & Sturmius Tuschmann, 2024. "Optimal Portfolio Choice with Cross-Impact Propagators," Papers 2403.10273, arXiv.org.

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