Trading Lightly: Cross-Impact and Optimal Portfolio Execution

Understand

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 synchronizing the execution of correlated contracts.