Trading lightly: cross-impact and optimal portfolio execution

13 February 2017

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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 synchronising the execution of correlated contracts.

Authors

Iacopo Mastromatteo , Michael Benzaquen , Zoltán Eisler , Jean-Philippe Bouchaud