Domino effect across financial charts, symbolizing cross-market impact

Decoding Cross-Market Impact: When One Market Moves Another

Theo Raines in Business & Economy December 2025 • 4 min read.

"Unveiling the Dynamics of Cross-Asset Influence in Financial Markets"

In the intricate world of financial markets, the price of an asset is traditionally viewed as a reflection of its intrinsic value, shaped by publicly available information. Standard economic theory suggests that market efficiency ensures prices accurately represent all known factors. However, in practice, the story is far more complex. Price formation is a dynamic process influenced by the trading activities of market participants, a phenomenon known as price impact.

Price impact, the measure of how much an asset's price moves in response to trading activity, has been a subject of extensive research. Early models proposed a simple linear relationship between trade volume and price changes. Yet, subsequent studies have revealed a more nuanced reality, highlighting the non-linear effects of large trades and the critical role of liquidity in absorbing market shocks. Understanding these dynamics is crucial for investors, traders, and policymakers alike.

One particularly intriguing aspect of price impact is the concept of cross-impact, where trading pressure in one asset spills over to influence the prices of others. This interconnectedness challenges the notion of isolated markets and opens up new avenues for understanding how information and sentiment propagate through the financial system. While previous research has touched upon cross-impact, a comprehensive understanding of its drivers and optimal measurement strategies remains elusive.

What Factors Determine Cross-Market Influence?

Domino effect across financial charts, symbolizing cross-market impact

A recent study delves deep into the dynamics of cross-impact, aiming to identify the key features that make it relevant in explaining price returns. By analyzing tick-by-tick data from 500 assets listed in the United States over five years, the researchers uncovered several critical factors that govern when and how cross-market influence takes hold. Let's break down their findings:

The researchers found that price formation is primarily driven by highly liquid assets. These assets, characterized by high trading volumes and tight bid-ask spreads, act as "liquidity reservoirs." Trades in these liquid assets then exert influence on the prices of less liquid, correlated products. This influence, however, is not instantaneous.

Liquidity is Key: Cross-impact is most pronounced when highly liquid assets influence less liquid ones.
Correlation Matters: Assets with stronger correlations exhibit greater cross-market influence.
Time Constraints Exist: The speed of cross-market influence is constrained by the minimum trading frequency of the influenced asset.

The speed at which cross-impact occurs is limited by the trading frequency of the less liquid asset. This makes intuitive sense: if an asset trades infrequently, it will take longer for trading pressure from another market to manifest in its price. Furthermore, the study highlights the importance of correlation between assets. The stronger the correlation, the more likely that trading activity in one will impact the price of the other.

Challenging Financial Theories

The study extends its investigation to interest rate markets, revealing that the 10-year bond future acts as a primary liquidity reservoir, influencing the prices of cash bonds and futures contracts across the interest rate curve. This finding challenges the conventional theory in Financial Economics that views long-term rates as reflections of agents' expectations of future short-term rates. Instead, it suggests that liquidity dynamics and cross-market influences play a more significant role than previously recognized.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

Everything You Need To Know

What is price impact and why is it important in financial markets?

Price impact refers to how much an asset's price changes in response to trading activity. This concept is crucial because traditional economic theory often assumes prices reflect intrinsic value based on available information. However, price impact shows that trading itself influences price formation. Understanding price impact helps investors, traders, and policymakers make informed decisions by recognizing that market dynamics go beyond just public information. It highlights the direct effect of trading on price, which is a critical factor in today's fast-paced financial world.

How does cross-impact challenge traditional views on financial markets?

Cross-impact, where trading pressure in one asset influences the prices of others, challenges the notion of isolated markets. Standard economic theory often views assets' prices as independent reflections of their individual values. Cross-impact demonstrates that markets are interconnected, with trading in one asset directly affecting others. This reveals hidden relationships and dependencies within the financial system, which goes against the idea of individual market efficiency and opens the door to more complex models that reflect these interconnected dynamics.

What role does liquidity play in cross-market influence?

Liquidity is a key factor in cross-market influence. Highly liquid assets, such as those with high trading volumes and tight bid-ask spreads, act as "liquidity reservoirs." Trading activity in these assets then impacts the prices of less liquid, but correlated assets. The study shows that cross-impact is most pronounced when highly liquid assets influence less liquid ones, showing how liquidity acts as a conduit for price movements across markets. The ability of liquid assets to absorb market shocks helps drive cross-market dynamics.

What are the key factors that determine cross-market influence?

The study identifies several critical factors that determine cross-market influence. First, the liquidity of an asset is key: Cross-impact is most pronounced when highly liquid assets influence less liquid ones. Second, the correlation between assets matters: assets with stronger correlations exhibit greater cross-market influence. Lastly, time constraints exist: The speed of cross-market influence is limited by the minimum trading frequency of the influenced asset, which dictates how quickly price changes occur. These factors highlight the complexities of how information and sentiment spread across financial markets.

How does the 10-year bond future affect interest rate markets, and what implications does this have on the financial theories?

The study reveals that the 10-year bond future acts as a primary liquidity reservoir, influencing the prices of cash bonds and futures contracts across the interest rate curve. This finding challenges the traditional Financial Economics theory that views long-term rates as reflections of agents' expectations of future short-term rates. Instead, it suggests that liquidity dynamics and cross-market influences play a more significant role in determining interest rates. This means that trading in the 10-year bond future can significantly impact the pricing of other interest rate instruments, which highlights the importance of considering cross-market effects when analyzing and trading in interest rate markets.