Trading lightly: cross-impact and optimal portfolio execution

A liquidity model for basket of correlated securities is presented

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Iacopo Mastromatteo, Michael Benzaquen, Zoltan Eisler and Jean-Philippe Bouchaud model the liquidation costs of a basket of correlated instruments by generalising the linear propagator model previously used for single instruments, obtaining an arbitrage-free cost model. They illustrate their results using a pool of US stocks, showing that neglecting cross-impact effects leads to an incorrect estimation of liquidity and results in suboptimal execution strategies that