Mehdi Tomas and Michael Benzaquen, Cross-Impact modeling on derivative markets

March 16 at 4 pm (CEST).
Presenters: Mehdi Tomas and Michael Benzaquen (CFM and Ecole Polytechnique)
Title: Cross-Impact modeling on derivative markets
Abstract: Impact modeling on derivatives is challenging on two grounds. First, liquidity in some markets (e.g., options) can be fragmented across correlated, illiquid instruments. Second, their prices are locked by non-arbitrage. Univariate impact models cannot account for these problems. Instead, we need to rely on cross-impact, its cross-sectional generalization. We introduce the Kyle cross-impact model which aggregates liquidity and is consistent with no-arbitrage. We illustrate our framework using data from E-Mini futures, options and VIX futures. The resulting model is useful for optimal execution and estimation of hedging costs.