Jour Fixe - Lead-Lag Relationships in Market Microstructure

Lead-Lag Relationships in Market Microstructure

We investigate high-frequency cross-asset lead-lag relationships using various market microstructure measures capturing price, liquidity, depth, and volatility dimensions. Using historical trade and order book data from stocks, futures, and exchange-traded products, we find that information from one asset's transaction prices and order book imbalance at the best quotes provides information about the future behavior of another asset's midpoint. We also discover lead-lag relationships between different volatility measures. Most of the lead-lag relationships in our sample exist between fundamentally related instruments. With respect to the determinants of lead-lag effects, we find that trading activity and liquidity strengthen the lead of equity-related instruments. However, this does not hold true for bond futures and exchange-traded products.