When is cross impact relevant ? (Le Coz et al.

, 2023)
Victor Le Coz, Iacopo Mastromatteo, Damien Challet, Michael Benzaquen
Ecole polytechnique, Quant AI Lab, & Capital Fund Management

CFM-Imperial Workshop on Market Microstructure

December 2023

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Outline
1. Introduction
2. Modeling assumptions
Definition of the models
3. Methodology
Data used
goodness-of-fit
Assets characteristics
4. Results
The effect of the bin size
The effect of the trading frequency
The effect of the correlation
The effect of the liquidity
Summary
5. Application to the interest rate curve
6. Conclusion

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Table of Contents

1. Introduction

2. Modeling assumptions

3. Methodology

4. Results

5. Application to the interest rate curve

6. Conclusion

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Definitions of price and cross impact in the case of anonymized data

▶ Price impact: the order flow imbalance qt ,i of asset i influences its price variation ∆pt ,i := pt +τ,i − pt ,i

▶ Cross impact: the order flow imbalance qt ,j of asset j influences the price variation of asset i ∆pt ,i

▶ Examples:
1. Same stock quoted by several stock exchange operators: Apple listed on Nasdaq and LSE
2. 2 different uncorrelated stocks: Tencent (technology) listed on HKEX vs Caterpillar (construction) listed on NYSE
3. 2 bonds from the same issuer with different maturities: 2Y US Treasury bond vs 10Y US Treasury bond

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Where do we stand ?

▶ Tomas et al. (2022):

– Established desirable properties constraining cross impact models

– Observed cross impact among anonimized data

▶ Open questions:

1. On which time scale τ is cross impact significant?

2. Which asset pairs (correlation, liquidity) exhibit significant cross impact?

3. What are the implications for interest rate markets?

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Table of Contents

1. Introduction

2. Modeling assumptions

3. Methodology

4. Results

5. Application to the interest rate curve

6. Conclusion

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Modeling assumptions

▶ Prices variations ∆pt and order flow imbalances qt are linearly related:

∆pt = Λt qt + ηt (1)

qt⊤ ∆pt = qt⊤ Λt qt + qt⊤ ηt (2)

▶ The cross-impact matrix Λt is a function of the form:

Λt = Λt (Σt , Ωt , Rt ), (3)

where
– Σt := cov(∆pt , ∆pt⊤ ) is the price variations covariance matrix

– Ωt := cov(qt , qt⊤ ) is the order flows covariance matrix

– Rt := cov(∆pt , qt⊤ ) is the response matrix

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Modeling assumptions

▶ Prices variations ∆pt and order flow imbalances qt are linearly related:

∆pt = Λt qt + ηt (1)

qt⊤ ∆pt = qt⊤ Λt qt + qt⊤ ηt (2)

▶ The cross-impact matrix Λt is a function of the form:

Λt = Λt (Σt , Ωt , Rt ), (3)

where
– Σt := cov(∆pt , ∆pt⊤ ) is the price variations covariance matrix

– Ωt := cov(qt , qt⊤ ) is the order flows covariance matrix

– Rt := cov(∆pt , qt⊤ ) is the response matrix

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Definition of the models
Let Y denote a scalar called the Y-ratio.

▶ Diagonal model:
Λdiag (Σ, Ω, R ) := Y diag(R ) diag(Ω−1 ) (4)

▶ Maximum Likelihood model (ML model):

ΛML (Σ, Ω, R ) := YR Ω−1 (5)

▶ Kyle model:
»
ΛKyle (Σ, Ω, R ) := Y (Ω−1/2 )⊤ (Ω1/2 )⊤ ΣΩ1/2 Ω−1/2 (6)

Rotational invariance Non-arbitrage Fragmentation invariance Stability

Diagonal ✗ ✓ ✗ ✓
ML ✓ ✗ ✓ ✗
Kyle ✓ ✓ ✓ ✓
Table: Properties of the models (Tomas et al., 2022)

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Definition of the models
Let Y denote a scalar called the Y-ratio.

▶ Diagonal model:
Λdiag (Σ, Ω, R ) := Y diag(R ) diag(Ω−1 ) (4)

▶ Maximum Likelihood model (ML model):

ΛML (Σ, Ω, R ) := YR Ω−1 (5)

▶ Kyle model:
»
ΛKyle (Σ, Ω, R ) := Y (Ω−1/2 )⊤ (Ω1/2 )⊤ ΣΩ1/2 Ω−1/2 (6)

Rotational invariance Non-arbitrage Fragmentation invariance Stability

Diagonal ✗ ✓ ✗ ✓
ML ✓ ✗ ✓ ✗
Kyle ✓ ✓ ✓ ✓
Table: Properties of the models (Tomas et al., 2022)

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Definition of the models
Let Y denote a scalar called the Y-ratio.

▶ Diagonal model:
Λdiag (Σ, Ω, R ) := Y diag(R ) diag(Ω−1 ) (4)

▶ Maximum Likelihood model (ML model):

ΛML (Σ, Ω, R ) := YR Ω−1 (5)

▶ Kyle model:
»
ΛKyle (Σ, Ω, R ) := Y (Ω−1/2 )⊤ (Ω1/2 )⊤ ΣΩ1/2 Ω−1/2 (6)

Rotational invariance Non-arbitrage Fragmentation invariance Stability

Diagonal ✗ ✓ ✗ ✓
ML ✓ ✗ ✓ ✗
Kyle ✓ ✓ ✓ ✓
Table: Properties of the models (Tomas et al., 2022)

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Table of Contents

1. Introduction

2. Modeling assumptions

3. Methodology

4. Results

5. Application to the interest rate curve

6. Conclusion

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Data used

▶ Tick-by-tick trades and quotes for 500 assets (including stocks, bonds, futures on bonds and futures on stock
indexes) quoted in limit order books in the United States

▶ 5 years of data from 2017 to 2022

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goodness-of-fit

▶ M-weighted generalized R-squared:

2
∥∆p − ∆
”p∥
R2 (M ) := 1 − M
(7)
∥∆p∥2M ▶ Errors can be measured:
−1
1. For all assets: M = Iσ := diag(⟨σt2 ⟩)

−1
2. For the asset i only: M = Iσi := diag(⟨σt2,i )⟩

▶ Accuracy increase from the cross sectional model:

∆R2 (M ) := R2 (M ) − R2diag (M ), (8)

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Asset characteristics

▶ Trading frequency fi , i.e. by the number of trades per second

▶ Price increments correlation ρij between the assets i and j

▶ Liquidity ω̄i σ̄i , i.e. the risk of profit or loss in monetary units over a time
window

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Table of Contents

1. Introduction

2. Modeling assumptions

3. Methodology

4. Results

5. Application to the interest rate curve

6. Conclusion

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The effect of the bin size

0.5
in-sample
0.20 out-sample 0.4

0.15
Rii
0.3
2

i i
Rii
0.10 i i

0.2
0.05
0.1
0.00
1
f
101 102 103
(seconds)
Figure: R2 (Iσi ) for Trimble Navigation (TRMB) over the years 2021 (in-sample) to 2022 (out-of-sample)

▶ This test provides an avenue to determine the maximum goodness-of-fit R2∗ (M ) and its optimal time scale τ ∗ (M )

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The effect of the trading frequency on the optimal time scale

2.09
103 1.78
1.50
1.24
(seconds)

102 0.98
0.74
0.50
*

101 0.28
slope = 1.0 0.12
0.05
10 1 100
fi (seconds 1)

Figure: Empirical distribution of the optimal time scale

out-of-sample τ ∗ (Iσi ) for single assets

▶ A minimum of 10 to 20 trades in both assets is required to reach the optimal time scale

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The effect of the trading frequency on the optimal time scale

2.78 2.17
2.09 103 2.42 1.79
103
103 1.78 2.00 1.45
1.50 1.59 1.12

(seconds)

(seconds)
102 1.21 0.81
1.24
(seconds)

0.85 102 0.61

102 0.98 0.53 0.46

*
0.74 101 0.33 0.35
0.50 slope = 1.0 0.21 0.20
*

101
101 0.28 10 1 100
0.08
100 101
0.07

slope = 1.0 0.12 min(fi, fj) (seconds 1) max(fi, fj) (seconds 1)

0.05
10 1 100 (a) As a function of the minimum (b) As a function of the maximum
fi (seconds 1) frequency frequency

Figure: Empirical distribution of the optimal time scale Figure: Empirical distribution of the optimal time scale
out-of-sample τ ∗ (Iσi ) for single assets out-of-sample τ∆∗
(Iσi ) for pairs of assets in the Kyle model

▶ A minimum of 10 to 20 trades in both assets is required to reach the optimal time scale

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The effect of the correlation on the goodness-of-fit

Kyle (in)
4slope = 0.03 [0.03, 0.03] 0.03 12 Kyle (out)
0.02 10 ML (in)
3 0.02 ML (out)
8

(%)
0.02
(%)

2 0.01 6

2*
2*

0.01
0.01 4
1
0.01 2
0 0.00 0
0.00
0 50 100 0 25 50 75
ij (%) ij (%)
(a) Empirical distribution of the out-of-sample ∆R2∗ (Iσ ) in the (b) Mean per correlation bucket of the optimal ∆R2∗ (Iσ )
Kyle model

▶ Trades only significantly explain the prices of highly correlated assets

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The effect of the correlation on the optimal time scale

0.04 Kyle (in) ML (in)

slope = 0.0 [0.0, 0.0] Kyle (out) ML (out)
0.03
103 103
0.03

(seconds)
0.03
(seconds)

102 0.02
0.02
102

*
0.01
*

101 0.01
0.00
0.00
0 50 100 0 25 50 75
ij (%) ij (%)
(a) Empirical distribution of the out-of-sample optimal time (b) Mean per correlation bucket of the optimal time scale τ ∗ (Iσ )
scale τ ∗ (Iσ ) in the Kyle model

▶ The optimal time scale τ ∗ seems unaffected by the correlation level ρij among pairs of assets

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The effect of the liquidity on the goodness-of-fit

45 60 slope = 4.44 [3.81, 5.07] 0.08

in-sample
out-sample 50 0.07
40 0.06
35 40 0.05

(%)
0.04
(%)

30 30
0.03

2*
2*

25 20 0.02
20 0.01
10 0.01
15
0.00
10 1 100 101 10 1 100 101
i i(K$) i i (K$)

(a) Mean R2∗ (Iσi ) by liquidity (b) Empirical distribution of the

bucket out-of-sample R2∗ (Iσi ) in the Kyle
model

Figure: For single assets

▶ Higher liquidity ensures a stronger correlation between price variations and order flows

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The effect of the liquidity on the goodness-of-fit

7 0.73
45 60 slope = 4.44 [3.81, 5.07] 0.08 12 Kyle (in)
slope = 1.34 [1.14, 1.54]
in-sample 6 0.62
out-sample 50 0.07 Kyle (out)
40 0.06 10 ML (in) 5 0.53
35 40 0.05 8 ML (out) 4 0.45

(%)
(%)
0.36

(%)
0.04
(%)

30 3

2*
30 6 0.27

2*
0.03

2*
2*

25 0.02 2 0.20
20 4
20 0.01 1 0.14
10 0.01 2 0.08
15 0
0.00 0.03
10 1 100 101 10 1 100 101 10 1 100 101 100
(K$) j j (K$)
i i (K$)
(K$) j j
i i explanatory asset explanatory asset
(a) Mean R2∗ (Iσi ) by liquidity (b) Empirical distribution of the
(a) Mean ∆R2∗ (Iσi ) by liquidity (b) Empirical distribution of the
bucket out-of-sample R2∗ (Iσi ) in the Kyle bucket out-of-sample ∆R2∗ (Iσi ) in the Kyle
model model

Figure: For single assets Figure: For pairs of assets

▶ Higher liquidity ensures a stronger correlation between price variations and order flows

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Cross effects of individual assets’ liquidity (1/3)

4 × 10 1 6 × 10 1 100 2 × 100
2* (%) error
(0.1, 0.1] 0.9 1.2 1.2 1.6 0.2 0.1 0.1 0.2

(K$, log scale)

(K$, log scale)

(0.1, 0.4] 0.7 1.1 1.1 1.4 1.3 1.4 0.1 0.0 0.0 0.0 0.1 0.3

predicted asset

predicted asset
▶ The liquidity of the explanatory asset j and the
(0.4, 1.1] 0.7 0.9 1.1 1.3 1.5 1.2 1.0 0.2 0.0 0.0 0.0 0.1 0.1 0.2
predicted asset i play symmetrical roles (1.1, 3.0] -0.1 0.4 0.7 1.1 1.7 1.5 1.1 1.3 0.1 0.0 0.0 0.1 0.1 0.2
(3.0, 8.1] 0.9 1.4 2.3 2.1 1.9 0.1 0.1 0.1 0.2 0.3
(8.1, 22.0] 0.7 1.1 1.8 2.8 2.5 0.1 0.1 0.1 0.3 0.3

i i

i i
(22.0, 442.4] 0.4 0.6 0.9 1.7 2.4 0.1 0.1 0.1 0.4 0.7

(0.1, 0.1]
(0.1, 0.4]
(0.4, 1.1]
(1.1, 3.0]
(3.0, 8.1]
(8.1, 22.0]
(22.0, 442.4]

(0.1, 0.1]
(0.1, 0.4]
(0.4, 1.1]
(1.1, 3.0]
(3.0, 8.1]
(8.1, 22.0]
(22.0, 442.4]
▶ Puzzle: trades information from a liquid asset does j j (K$, log scale) j j (K$, log scale)
explanatory asset explanatory asset
not help to predict an illiquid price
Figure: Mean out-of-sample added accuracy on asset i ∆R2 (Iσi )
in the Kyle model

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Cross effects of individual assets’ liquidity (2/3): neutralizing correlation
10 2 10 1 100 101
(%) 2* (%)
2* (%)
2*
ij (%) (0, 20] ij (%) (20, 50] ij (%) (50, 100]
(0.1, 0.1] 0.6 0.7 0.8 0.8 -0.0 0.7 1.2 1.5 1.9 2.7 -0.3 2.8 3.3 2.6 5.3

(K$, log scale)

(K$, log scale)

(K$, log scale)

(0.1, 0.4] 0.4 0.5 0.5 0.5 0.4 1.2 -0.1 0.9 1.2 1.4 1.8 2.3 1.9 1.9 2.8 3.0 5.1 4.9

predicted asset

predicted asset

predicted asset
(0.4, 1.1] 0.6 0.7 0.8 0.9 0.7 0.6 0.8 0.9 1.0 1.3 1.9 1.6 1.3 2.2 2.8 4.1 4.9 6.6 8.1
(1.1, 3.0] -0.2 0.3 0.5 0.7 0.5 0.5 0.6 0.9 1.2 1.8 1.7 1.3 3.0 3.6 4.2 5.1 5.4
(3.0, 8.1] 0.9 1.0 1.4 0.8 1.0 1.5 2.3 2.2 2.0 3.1 4.0 4.0 4.0
(8.1, 22.0] 0.5 0.9 1.3 -0.0 0.5 0.8 1.5 2.4 2.8 2.6 2.3 1.4 2.1 4.4 4.6 3.5

i i

i i

i i
(22.0, 442.4] 0.7 1.1 1.4 0.3 0.4 0.6 1.2 0.9 0.2 0.5 0.8 1.1 2.3 3.3 11.4
j j (K$, log scale) j j (K$, log scale) j j (K$, log scale)
explanatory asset explanatory asset explanatory asset
error error error
▶ Cross-impact better explains price ij (%) (0, 20] ij (%) (20, 50] ij (%) (50, 100]
(0.1, 0.1] 0.2 0.1 0.1 0.2 0.3 3.6 0.1 0.1 0.1 0.3 1.3 0.6 0.3 0.4 0.3 0.5 1.4

(K$, log scale)

(K$, log scale)

(K$, log scale)

variances if the predicted asset has a (0.1, 0.4] 0.1 0.0 0.0 0.0 0.1 0.3 0.2 0.1 0.0 0.0 0.0 0.1 0.5 0.6 0.3 0.1 0.1 0.2 0.8

predicted asset

predicted asset

predicted asset
lower liquidity than the explanatory asset (0.4, 1.1] 0.2 0.1 0.0 0.1 0.1 0.1 0.2 0.2 0.0 0.0 0.0 0.1 0.1 0.3 0.7 0.1 0.1 0.1 0.3 0.8 1.4
(1.1, 3.0] 1.7 0.1 0.0 0.1 0.1 0.2 0.2 0.3 0.0 0.0 0.1 0.1 0.2 1.5 0.3 0.2 0.2 0.7 1.2
(3.0, 8.1] 0.2 0.4 0.1 0.1 0.3 0.3 0.3 0.6 0.2 0.1 0.1 0.2 0.4 1.7 0.6 0.5 0.4 0.6
(8.1, 22.0] 0.2 0.1 0.2 1.3 0.7 0.5 0.2 0.1 0.2 0.2 0.2 0.3 0.7 0.1 0.7 1.8 1.4 1.2 6.1
i i

i i

i i
(22.0, 442.4] 0.1 0.4 0.4 0.2 0.5 0.3 2.4 1.0 0.1 0.1 0.1 0.3 0.3 0.6 0.1 0.2 0.2 0.2 0.7 1.0 4.5

(0.1, 0.1]
(0.1, 0.4]
(0.4, 1.1]
(1.1, 3.0]
(3.0, 8.1]
(8.1, 22.0]
(22.0, 442.4]

(0.1, 0.1]
(0.1, 0.4]
(0.4, 1.1]
(1.1, 3.0]
(3.0, 8.1]
(8.1, 22.0]
(22.0, 442.4]

(0.1, 0.1]
(0.1, 0.4]
(0.4, 1.1]
(1.1, 3.0]
(3.0, 8.1]
(8.1, 22.0]
(22.0, 442.4]
j j (K$, log scale) j j (K$, log scale) j j (K$, log scale)
explanatory asset explanatory asset explanatory asset

Figure: Mean out-of-sample added accuracy on asset i ∆R2 (Iσi ) in the Kyle model

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Cross effects of individual assets’ liquidity (3/3): limited effects of the theoretical Kyle

▶ Empirical observation: R-squared are

higher when the predicted asset has a
lower liquidity than the explanatory asset
Figure: Mean out-of-sample added accuracy on asset i ∆R2 (Iσi ) in the Kyle model

101 100 10 1 10 2
2 (%) 2 (%) 2 (%)
ij = 10% ij = 35% ij = 75%
0.1 0.0 -0.0 0.0 0.0 -0.0 0.0 0.0 -0.6 -0.9 -1.1 -1.2 -1.2 -1.2 -1.2 -1.6 -2.1 -2.3 -2.3 -2.3 -2.3 -2.3
(K$, log scale)

(K$, log scale)

(K$, log scale)

predicted asset

predicted asset

▶ Theoretical Kyle: R-squared exhibit a 0.3 -0.0 -0.0 0.0 0.0 -0.0 0.0
1.0 -0.0 0.0 0.0 -0.0 0.0 -0.0
tenuous (inversed) reliance on liquidity 3.2 -0.0 0.0 -0.0 0.0 0.0 0.0
10.0 -0.0 0.0 0.0 0.0 0.0 -0.0
31.6 -0.0 -0.0 0.0 0.0 -0.0 0.0
100.0 0.0 0.0 -0.0 0.0 -0.0 0.0
i i
predicted asset
0.0 -0.3 -0.6 -1.0 -1.1 -1.2 -1.2 -1.2 -0.9 -1.6 -2.2 -2.3 -2.3 -2.3 -2.3
0.0 -0.1 -0.3 -0.6 -0.9 -1.1 -1.2 -1.2 -0.3 -0.8 -1.6 -2.1 -2.3 -2.3 -2.3
0.0 -0.0 -0.1 -0.3 -0.6 -0.9 -1.1 -1.2 -0.1 -0.3 -0.8 -1.6 -2.1 -2.3 -2.3
0.0 -0.0 -0.0 -0.1 -0.3 -0.6 -0.9 -1.1 -0.0 -0.1 -0.3 -0.8 -1.6 -2.1 -2.3
0.0 -0.0 -0.0 -0.0 -0.1 -0.3 -0.6 -0.9 -0.0 -0.0 -0.1 -0.3 -0.8 -1.6 -2.1
0.0 -0.0 -0.0 -0.0 -0.0 -0.1 -0.3 -0.6 -0.0 -0.0 -0.0 -0.1 -0.3 -0.8 -1.6

i i

i i
0.1
0.3
1.0
3.2
10.0
31.6
100.0

0.1
0.3
1.0
3.2
10.0
31.6
100.0

0.1
0.3
1.0
3.2
10.0
31.6
100.0
j j (K$, log scale) j j (K$, log scale) j j (K$, log scale)
explanatory asset explanatory asset explanatory asset

Figure: Theoretical added accuracy on asset i ∆R2 (Iσi ) in the Kyle model

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Summary

1. A minimum of 10 to 20 trades in both assets is required to reach the optimal time scale

2. Trades only significantly explain the prices of highly correlated assets

3. Cross-impact better explains price variances if the predicted asset has a lower liquidity than the explanatory asset

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Table of Contents

1. Introduction

2. Modeling assumptions

3. Methodology

4. Results

5. Application to the interest rate curve

6. Conclusion

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Assets pairs

100 101
2* (%)
bond future 2Y 5.4 8.2 4.1 1.8 1.0 1.6 3.9 3.0 3.3 0.3
bond future 5Y 2.9 14.7 5.6 1.2 1.4 2.5 7.4 3.9 8.2 2.3
bond future 10Y 1.9 5.5 4.7 1.0 0.7 1.3 4.2 2.7 6.8 3.2
bond future 20Y 1.8 5.1 12.6 2.4 0.7 1.3 5.0 3.6 11.0 6.7
asset i (predicted)

bond future 30Y 0.9 3.6 10.6 9.1 0.4 0.9 3.9 2.7 9.5 7.7
cash bond 2Y 6.9 7.8 11.0 5.8 1.2 5.3 7.6 6.4 5.8 2.0
cash bond 3Y 7.3 11.6 16.4 7.8 1.4 4.6 9.0 6.8 8.4 2.4
cash bond 5Y 5.2 11.2 18.9 9.2 1.0 2.1 2.8 5.1 9.7 3.0
cash bond 7Y 4.2 10.5 18.5 12.1 1.8 2.5 3.9 9.6 14.4 5.2
cash bond 10Y 2.8 7.3 14.9 10.3 1.1 1.1 1.7 5.3 4.2 4.7
cash bond 30Y 1.4 5.0 11.7 14.0 2.7 0.8 1.4 4.8 3.9 10.1
bond future 2Y
bond future 5Y
bond future 10Y
bond future 20Y
bond future 30Y
cash bond 2Y
cash bond 3Y
cash bond 5Y
cash bond 7Y
cash bond 10Y
asset j (explanatory) cash bond 30Y

(a) Out-of-sample added accuracy ∆R2 (Iσi ) in the Kyle model

▶ The 10Y future is the main liquidity reservoir influencing the other tenors, contrary to prevailing Economics theory

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Assets pairs

100 101 101

bond future 2Y
bond future 5Y 2.9
bond future 10Y 1.9 5.5
bond future 20Y 1.8 5.1 12.6
2*
5.4 8.2 4.1 1.8 1.0 1.6 3.9 3.0 3.3 0.3
14.7 5.6 1.2 1.4 2.5 7.4 3.9 8.2 2.3
4.7 1.0 0.7 1.3 4.2 2.7 6.8 3.2
2.4 0.7 1.3 5.0 3.6 11.0 6.7
(%) 2 (%)
cash bond 2Y 1.1 9.0 14.7 17.8 19.3 20.0 20.1 22.2 22.8 22.7 24.9
cash bond 3Y 7.6 3.4 16.8 20.9 23.7 24.2 25.7 29.9 30.0 31.1 34.9
cash bond 7Y 13.8 16.7 11.5 19.0 24.5 27.0 33.6 38.5 38.4 42.1 45.3
bond future 2Y 5.7 8.6 14.0 6.4 15.8 17.2 17.4 19.6 20.6 20.5 22.5

asset i (predicted)
asset i (predicted)

bond future 30Y 0.9 3.6 10.6 9.1 0.4 0.9 3.9 2.7 9.5 7.7 cash bond 5Y 14.1 17.1 23.2 26.2 11.8 27.6 32.7 38.0 37.9 40.4 45.2
cash bond 2Y 6.9 7.8 11.0 5.8 1.2 5.3 7.6 6.4 5.8 2.0 cash bond 30Y 12.6 13.6 16.1 16.5 18.0 12.0 24.0 25.7 26.6 32.0 34.8
cash bond 3Y 7.3 11.6 16.4 7.8 1.4 4.6 9.0 6.8 8.4 2.4 cash bond 10Y 19.8 21.4 25.1 26.9 29.2 32.5 18.7 36.6 37.2 42.3 47.0
cash bond 5Y 5.2 11.2 18.9 9.2 1.0 2.1 2.8 5.1 9.7 3.0 bond future 5Y 18.1 20.6 25.0 26.9 31.9 32.7 36.4 16.5 36.4 38.4 43.1
cash bond 7Y 4.2 10.5 18.5 12.1 1.8 2.5 3.9 9.6 14.4 5.2 bond future 30Y 4.9 5.6 7.6 8.3 10.2 17.2 22.8 24.2 4.5 29.8 32.6
cash bond 10Y 2.8 7.3 14.9 10.3 1.1 1.1 1.7 5.3 4.2 4.7 bond future 20Y 18.0 19.3 22.6 23.4 26.3 30.7 36.6 38.5 37.5 17.3 40.8
cash bond 30Y 1.4 5.0 11.7 14.0 2.7 0.8 1.4 4.8 3.9 10.1 bond future 10Y 27.7 29.0 31.2 32.4 35.4 36.5 40.7 43.7 43.3 45.2 27.0
bond future 2Y
bond future 5Y
bond future 10Y
bond future 20Y
bond future 30Y

bond future 2Y

bond future 5Y
bond future 30Y
bond future 20Y
bond future 10Y
cash bond 2Y
cash bond 3Y
cash bond 5Y
cash bond 7Y
cash bond 10Y
cash bond 30Y

cash bond 2Y
cash bond 3Y
cash bond 7Y

cash bond 5Y
cash bond 30Y
cash bond 10Y
asset j (explanatory) cumulative assets 1 to j (explanatory)

2
(a) Out-of-sample added accuracy ∆R (Iσi ) in the Kyle model (b) Out-of-sample goodness-of-fit R2 (Iσi ) for an increasing
number of explanatory assets

▶ The 10Y future is the main liquidity reservoir influencing the other tenors, contrary to prevailing Economics theory

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Kyle matrix

0 10 1 100 101
p
p (basis points per 100 M$ of notional)
bond future 2Y 0.2 0.1 0.0 -0.0 -0.0 0.1 0.1 0.0 0.0 0.0 -0.1
bond future 5Y 0.1 0.3 0.1 0.1 0.0 0.0 0.1 0.2 0.2 0.1 0.0
bond future 10Y 0.0 0.1 0.3 0.3 0.3 0.0 0.1 0.2 0.3 0.3 0.4
bond future 20Y -0.0 0.1 0.3 2.0 2.1 -0.0 -0.0 0.1 0.4 0.9 2.4
bond future 30Y -0.0 0.0 0.3 2.1 6.4 -0.0 -0.0 0.1 0.4 1.0 6.5
cash bond 2Y 0.1 0.0 0.0 -0.0 -0.0 0.7 0.1 0.0 0.0 -0.0 -0.1
cash bond 3Y 0.1 0.1 0.1 -0.0 -0.0 0.1 0.6 0.1 0.1 0.0 -0.0
cash bond 5Y 0.0 0.2 0.2 0.1 0.1 0.0 0.1 0.6 0.2 0.2 0.1
cash bond 7Y 0.0 0.2 0.3 0.4 0.4 0.0 0.1 0.2 3.2 0.4 0.2
cash bond 10Y 0.0 0.1 0.3 0.9 1.0 -0.0 0.0 0.2 0.4 2.0 1.3
cash bond 30Y -0.1 0.0 0.4 2.4 6.5 -0.1 -0.0 0.1 0.2 1.3 12.8
bond future 2Y
bond future 5Y
bond future 10Y
bond future 20Y
bond future 30Y
cash bond 2Y
cash bond 3Y
cash bond 5Y
cash bond 7Y
cash bond 10Y
cash bond 30Y

(a) Kyle matrix in relative price change

▶ Contrary to no-arbitrage models, trading a low-liquidity asset is still expensive in this framework, which limits the
ability to close arbitrage opportunities

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Kyle matrix

0 10 1 100 101 100 10 1 0

p
p (basis points per 100 M$ of notional) p
(basis points per 100 M$ of notional in equivalent 10-year bond)
T
bond future 2Y 0.2 0.1 0.0 -0.0 -0.0 0.1 0.1 0.0 0.0 0.0 -0.1 bond future 2Y -0.59 -0.07 -0.02 0.00 0.00 -0.21 -0.13 -0.04 -0.02 -0.00 0.02
bond future 5Y 0.1 0.3 0.1 0.1 0.0 0.0 0.1 0.2 0.2 0.1 0.0 bond future 5Y -0.08 -0.17 -0.04 -0.01 -0.00 -0.06 -0.10 -0.11 -0.06 -0.03 -0.00
bond future 10Y 0.0 0.1 0.3 0.3 0.3 0.0 0.1 0.2 0.3 0.3 0.4 bond future 10Y -0.02 -0.04 -0.04 -0.02 -0.01 -0.02 -0.03 -0.04 -0.05 -0.04 -0.02
bond future 20Y -0.0 0.1 0.3 2.0 2.1 -0.0 -0.0 0.1 0.4 0.9 2.4 bond future 20Y 0.00 -0.01 -0.03 -0.08 -0.06 0.01 0.00 -0.01 -0.05 -0.07 -0.07
bond future 30Y -0.0 0.0 0.3 2.1 6.4 -0.0 -0.0 0.1 0.4 1.0 6.5 bond future 30Y 0.01 -0.00 -0.02 -0.07 -0.14 0.01 0.01 -0.01 -0.03 -0.07 -0.14
cash bond 2Y 0.1 0.0 0.0 -0.0 -0.0 0.7 0.1 0.0 0.0 -0.0 -0.1 cash bond 2Y -0.19 -0.04 -0.01 0.01 0.01 -1.77 -0.13 -0.05 -0.00 0.02 0.01
cash bond 3Y 0.1 0.1 0.1 -0.0 -0.0 0.1 0.6 0.1 0.1 0.0 -0.0 cash bond 3Y -0.11 -0.08 -0.02 0.00 0.00 -0.13 -0.64 -0.07 -0.03 -0.01 0.00
cash bond 5Y 0.0 0.2 0.2 0.1 0.1 0.0 0.1 0.6 0.2 0.2 0.1 cash bond 5Y -0.04 -0.09 -0.03 -0.01 -0.01 -0.05 -0.07 -0.26 -0.05 -0.03 -0.01
cash bond 7Y 0.0 0.2 0.3 0.4 0.4 0.0 0.1 0.2 3.2 0.4 0.2 cash bond 7Y -0.02 -0.05 -0.04 -0.03 -0.02 -0.00 -0.03 -0.05 -0.64 -0.06 -0.01
cash bond 10Y 0.0 0.1 0.3 0.9 1.0 -0.0 0.0 0.2 0.4 2.0 1.3 cash bond 10Y -0.00 -0.02 -0.03 -0.05 -0.03 0.02 -0.00 -0.03 -0.06 -0.20 -0.04
cash bond 30Y -0.1 0.0 0.4 2.4 6.5 -0.1 -0.0 0.1 0.2 1.3 12.8 cash bond 30Y 0.02 -0.00 -0.01 -0.04 -0.07 0.01 0.00 -0.01 -0.01 -0.04 -0.14
bond future 2Y
bond future 5Y
bond future 10Y
bond future 20Y
bond future 30Y
cash bond 2Y
cash bond 3Y
cash bond 5Y
cash bond 7Y
cash bond 10Y
cash bond 30Y

bond future 2Y
bond future 5Y
bond future 10Y
bond future 20Y
bond future 30Y
cash bond 2Y
cash bond 3Y
cash bond 5Y
cash bond 7Y
cash bond 10Y
cash bond 30Y
(a) Kyle matrix in relative price change (b) Kyle matrix in absolute variation of annual yield

▶ Contrary to no-arbitrage models, trading a low-liquidity asset is still expensive in this framework, which limits the
ability to close arbitrage opportunities

www.EconophysiX.com CFM Chair of Econophysics & Complex Systems 25 / 28

Table of Contents

1. Introduction

2. Modeling assumptions

3. Methodology

4. Results

5. Application to the interest rate curve

6. Conclusion

www.EconophysiX.com CFM Chair of Econophysics & Complex Systems 26 / 28

Conclusion

▶ Summary:
– Accurate price predictions can be achieved by appropriately considering time scale, correlation, and liquidity

– Interest rate markets: the 10Y future is the main liquidity reservoir influencing the other tenors, contrary to prevailing
Financial Economics theory

▶ Limitation: the auto-correlation of signed order flows statistically invalidates linear cross impact models

▶ Next step: understand why certain asset prices are best explained by their trades at significantly longer time
scales than suggested by their trading frequency

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References

Le Coz, Victor, Iacopo Mastromatteo, Damien Challet, and Michael Benzaquen (2023). When is cross impact
relevant? arXiv:2305.16915 [cond-mat, q-fin]. May 2023. URL: http://arxiv.org/abs/2305.16915 (visited on
06/08/2023).

Tomas, Mehdi, Iacopo Mastromatteo, and Michael Benzaquen (2022). “How to build a cross-impact model from
first principles: theoretical requirements and empirical results”. en. In: Quantitative Finance 22.6 (June 2022),
pp. 1017–1036. ISSN: 1469-7688, 1469-7696. DOI: 10.1080/14697688.2021.2020328. URL:
https://www.tandfonline.com/doi/full/10.1080/14697688.2021.2020328 (visited on 05/16/2023).

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