Cross-response in correlated financial markets: individual stocks

TL;DR

This paper investigates how trades in one stock influence others in correlated markets, revealing transient impacts, short-memory trade sign correlations, and comparing self- and cross-responses across different scales.

Contribution

It provides the first empirical analysis of cross-responses among stocks, highlighting the transient nature of trade impacts and the short-memory of trade sign correlations.

Findings

Cross-responses are transient rather than permanent.

Trade sign cross-correlations exhibit short-memory behavior.

Self- and cross-responses differ across scales.

Abstract

Previous studies of the stock price response to trades focused on the dynamics of single stocks, i.e. they addressed the self-response. We empirically investigate the price response of one stock to the trades of other stocks in a correlated market, i.e. the cross-responses. How large is the impact of one stock on others and vice versa? -- This impact of trades on the price change across stocks appears to be transient instead of permanent as we discuss from the viewpoint of market efficiency. Furthermore, we compare the self-responses on different scales and the self- and cross-responses on the same scale. We also find that the cross-correlation of the trade signs turns out to be a short-memory process.