Cross-impact of order flow imbalance in equity markets

Abstract

We investigate the impact of order flow imbalance (OFI) on price movements in equity markets in a multi-asset setting.First, we propose a systematic approach for combining OFIs at the top levels of the limit order book into an integrated OFI variable which better explains price impact, compared to the best-level OFI.We show that once the information from multiple levels is integrated into OFI, multi-asset models with cross-impact do not provide additional explanatory power for contemporaneous impact compared to a sparse model without cross-impact terms.On the other hand, we show that lagged cross-asset OFIs do improve the forecasting of future returns.We also establish that this lagged cross-impact mainly manifests at short-term horizons and decays rapidly in time.

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