trading strategy vs delayed pricing

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The Effect of Dealing Costs and Delay connected Performance Drag

Financial Analysts Journal

Published By: Taylor danamp; Francis, Ltd.

Financial Analysts Journal

https://web. jstor .org/stable/4479629

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Abstract

Trading a security measures involves non only the organize costs of commissions and price impact, but also indirect opportunity costs that arise when a swap cannot be executed or keister be executed alone with a delay. One way to capture the order of magnitude of opportunity costs is to take for granted that the excess yield from an active trade will decline exponentially with the clock time since the trade was planned. The optimum time to trade in (alternatively, the optimal holding period) then depends on the difficulty of executing the trade. Effectuation difficulty depends successively on the excess return initially predicted from an agile trade, on a constant that captures the decay concluded time in the value of the entropy that driven the merchandise, and on direct trading costs and execution delays. Different investment styles will run to have varied values for these parameters. The value of a trade based along market momentum, for instance, may atomic number 4 initially selfsame high schoo merely decline quickly ended time, whereas the value of a trade supported value may be initially more modest only besides more long-lasting. Both the take and asquint costs of trading are captured in the concept of performance drag--the difference between the range of return on a perpetual paper portfolio that is continually updated as though trading costs were zero and the pace of return on an actual portfolio. The maximisation of return net of performance drag indicates that value-minded and earnings-momentum investment funds styles should prefer disparate approaches to trading. Pursuing the harmonious approach to trading is likely to result in significant payoffs in terms of enhanced return.

Journal Information

The Financial Analysts Daybook aims to be the leadership practitioner journal in the investment management profession past advancing the knowledge and understanding of the practice of investment direction through the publication of rigorous, match-reviewed, practitioner-relevant research from leading academics and practitioners.

Publisher Information

Building on two centuries' experience, Taylor danamp; Francis has grown rapidlyover the final two decades to become a starring international domain publishing firm.The Group publishes over 800 journals and over 1,800 new books each year, coveringa full variety of subject areas and incorporating the journal imprints of Routledge,Carfax, Spon Iron out, Psychology Constrict, Martin Dunitz, and Taylor danAMP; Francis.Taylor danadenosine monophosphate; Francis is full committed to the publication and dissemination of scholarly information of the highest quality, and nowadays this remains the primary goal.