Cross impact in derivative markets

Abstract: Trading a financial asset pushes its price as well as the prices of other assets, a phenomenon known as cross-impact. The empirical estimation of this effect on complex financial instruments, such as derivatives, is an open problem. To address this, we consider a setting in which the prices of derivatives is a deterministic function of stochastic factors where trades on both factors and derivatives induce price impact. We show that a specific cross-impact model satisfies key properties which make its estimation tractable in applications. Using E-Mini futures, European call and put options and VIX futures, we estimate cross-impact and show our simple framework successfully captures some of the empirical phenomenology. Our framework for estimating cross-impact on derivatives may be used in practice for estimating hedging costs or building liquidity metrics on derivative markets.