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The composition of natural liquidity has been changing over time. An analysis of intraday volumes for the SP and, to the increased trading intensity of such strategies towards the end of the trading session, e.g., due to execution of mutual fund inflows/outflows that are benchmarked to the closing price on each day. In this paper, we investigate the consequences of such portfolio liquidity on price impact and portfolio execution. We derive a linear cross-asset market impact from a stylized model that explicitly captures the fact that a certain fraction of natural liquidity providers only trade portfolios of stocks whenever they choose to execute. We find that due to cross-impact and its intraday variation, it is optimal for a risk-neutral, cost minimizing liquidator to execute a portfolio of orders in a coupled manner, as opposed to a separable VWAP-like execution that is often assumed. The optimal schedule couples the execution of the various orders so as to be able to take advantage of increased portfolio liquidity towards the end of the day. A worst case analysis shows that the potential cost reduction from this optimized execution schedule over the separable approach can be as high as 6% for plausible model parameters. Finally, we discuss how to estimate cross-sectional price impact if one had a dataset of realized portfolio transaction records that exploits the low-rank structure of its coefficient matrix suggested by our analysis.

Cross-Sectional Variation of Intraday Liquidity, Cross-Impact, and Their Effect on Portfolio Execution