Price Impact of Order Flow Imbalance : Multi-level, Cross-asset and Forecasting

We investigate the impact of order flow imbalance (OFI) on price movements in equity markets in a multi-asset setting. First, we show that taking into account multiple levels of the order book when defining order book imbalance leads to higher explanatory power for the contemporaneous price impact of OFI. Using a principal component analysis of OFI across order book levels, we define a notion of integrated OFI which shows superior explanatory power for market impact both in-sample and out-of-sample. Second, we examine the notion of cross-impact and show that, once the information from multiple levels is included in 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. However, we find evidence that cross-impact terms provide additional information for intraday forecasting of future returns