Questions tagged [transaction-costs]

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2 votes
0 answers
71 views

Variables for predicting price impact

Can anyone please recommend papers(other than Frazzini, 2017) that recommend market variables or any other predictors to model temporary price impact when you buy / sell a trade? This would fall under ...
3 votes
0 answers
123 views

How to take into account transaction fee of a backtest from a list of returns?

I have a list of booleans that correspond to buy and sell signals that I would like to backtest. To achieve this, I calculated the return ret of a security and when ...
1 vote
2 answers
72 views

Is there a difference between heterogeneous expectations and heterogeneous cost of capital? How are assets priced in these situations?

How are asset prices set when investors face heterogeneous expectations? Does some form of "negotiation" take place so that the market price is set? Can investors face heterogeneous costs ...
1 vote
0 answers
66 views

Value: High-minus-low factor fama french - transaction costs

Anyone know any references on how to estimate transaction costs for a give trading strategy? In more specific terms, if I want to estimate the returns on an HML value strategy as in Fama-French 1993, ...
4 votes
2 answers
2k views

Half of the bid-ask spread as transaction cost

I am currently reading "Deviations from Covered Interest Rate Parity" by Du et al. When establishing deviations from CIRP they consider transaction costs as follows. "We assume that the transaction ...
0 votes
0 answers
118 views

Why do we need a brokerage?

I understand that there exist direct stock plans that allow you to buy shares directly from a company. However, these have obvious and large downsides, so we can disregard them. Furthermore, I am not ...
0 votes
1 answer
63 views

Difference between real and expected average transaction price of an order?

This might be a really simple question but I'm quite confused. I've been given a limit order book (I don't think it's necessary to upload it for my question but I can if you want me to) and I've been ...
0 votes
0 answers
142 views

Market making with transaction fee literature

In the past 2 months, I have read number of literature on market making; however, all of it has not considered transaction fee. Therefore, when implemented, those strategies are all loss-making after ...
4 votes
1 answer
793 views

Magnitude of Transaction Cost for Institutional Investors

For my thesis, I'm writing about robust portfolio allocation. I have the idea to include a measure of transaction cost, since ignoring them seems too simplifying for a real-world problem. Comparing a ...
1 vote
0 answers
66 views

Implementing transaction costs to portfolio returns

I want to implement transaction costs to the betting against beta strategy. Have any of you guys a simple way to add this to the strategy? As I understand from a bit of reading, I need to calculate ...
1 vote
0 answers
29 views

What do typical transaction cost models predict about the long-term price impact of buying 1% of a stock’s shares outstanding?

Assuming that the stock has 100% annual turnover, this amounts to buying 2.5 days of total volume. Of course, such a trade will take a long time to execute. The question is: suppose the trade can be ...
0 votes
1 answer
71 views

When backtesting Nikkei225 futures with market orders, how many points to account for eventual slippage and trading costs?

I want to backtest a strategy based on Nikkei 225 futures (preferable at the Singapore exchange). I am using market orders for entry and exit. Although I now that theoretically market orders for a ...
5 votes
0 answers
82 views

Can the risk-neutral measure depend on the option type?

In an ideal Black-Scholes setting, the Risk-Neutral measure $Q$ is unique and so, obviously, does not depend on what derivative instrument we want to price. Assume some deviation from perfect markets (...
4 votes
1 answer
1k views

Bid-Ask spread in Roll's model: Negative autocovariance of returns and informational content

Currently studying on techniques to estimate the bid-ask spread. Perhaps the most widely known model is the Roll model (1984). Let $P_t$ indicate log prices $\begin{cases} Bid_t=P_t-c, \\ ...
2 votes
1 answer
282 views

Smooth pasting conditions for optimal investment with transactions costs

I'm reading this paper relating to optimal investment with transaction costs where some value function $F(x)$ is optimized. At some boundary $x=u$ it will be optimal to pay a proportional cost $C$ ...
2 votes
0 answers
230 views

Market impact in optimization objective function

Can anyone help to explain why when the square root market impact model is used in the standard mean-variance optimization, the exponent becomes $\frac{5}{3}$ in the objective function? I suspect this ...
2 votes
0 answers
375 views

Transform this non-linear portfolio optimization problem into a quadratic optimization problem

I have a portfolio optimization problem similar to this question here, with a V-shape transaction costs such that we pay a fee proportionally to the sum of absolute rebalancing: $$TC(\omega) = \frac{1}...
0 votes
0 answers
33 views

Broker Cost Historic extrapolation

Given some broker costs today. What is the best way to extrapolate them into the history ? Would it be linear or exponential rise (towards history) ? This would be for backtest simulation involving ...
1 vote
1 answer
57 views

How brokers' spread costs work?

I am trying to understand how to size and compare brokers' costs. As per my understanding, they charge customers on either or both spreads and commissions. The latters are straightforward: for each ...
1 vote
0 answers
263 views

Error in optimize.portfolio with transaction costs constraint

I am experimenting with the PortfolioAnalytics package to optimize portfolio with dollar neutral and transaction costs as constraints to the quadratic utility objective function. A sample R snippet is ...
2 votes
0 answers
65 views

Cheapest instrument choice for low frequency long/short equity

I am trading a market neutral long/short equity portfolio. Right now I am trading cash equities, but I am interested in replacing some or all of the cash equities with derivatives, either single stock ...
2 votes
0 answers
105 views

Why not to maximize Sharpe Ratio directly when computing optimal allocation of an order?

I was reading the following paper of Engle about balancing transaction costs performance and risk: https://www.nber.org/papers/w12165.pdf He deals with finding the optimal placement of the child ...
1 vote
0 answers
180 views

transactions costs and leland modified volatility

When there are transactions costs, we are in a situation of incomplete market. What does the modified volatility of Leland (Option Pricing and Replication with Transactions Costs, 1985) bring us? can ...
0 votes
2 answers
178 views

Transaction costs in option market

The transaction costs in option market could be quite large. The bid ask spread of a SP500 firm could be around 15% of the mid-quote when I check the data. Since I do not have data on transaction ...
4 votes
1 answer
236 views

Does financial transaction tax (FFT) debilitate high frequency trading?

In Taiwan there is a FFT of 0.3% on equity sell, and coincidentally HFT seemed to be non-existent in Taiwan market. HFT features high volumes of trades, does the tax make HFT infeasible?
1 vote
0 answers
74 views

forex backtesting spread cost modeling

For professional level forex trading, what is a reasonable estimate of roundtrip transaction costs (I am talking about major pairs, like EUR/USD).
3 votes
1 answer
337 views

Portfolio optimization with non-linear cost

I am trying to solve a mean-variance problem with a non-linear market impact cost term in there. This is the problem I am trying to solve $$ \max_x \left ( \alpha x - \gamma x' \Sigma x - a\sqrt{|x-...
1 vote
1 answer
105 views

Smart transaction cost model (for spread contracts)

In futures there exist exchange traded calendar spread contracts, which trade as a single unit (think May/June Crude Oil). The bid ask spread for the spread contracts is the same as that of the ...
1 vote
0 answers
63 views

Excessive trading due to sharp cutoffs

I am running a stock trading system based on traditional factors (value, momentum, etc). I generate a combined factor score for each stock on every day at the close, and at the open of the next day, I ...
2 votes
1 answer
250 views

Out-of-sample performance

I got a problem when calculating the out-of-sample performance of my model. I have the following settings: I have daily data. I use a rolling window of 1 week. I use the previous six months of data ...
3 votes
1 answer
1k views

Intraday versus daily volatility in slippage estimation

On page 21 of http://www.cims.nyu.edu/~almgren/papers/costestim.pdf Almgren has the formula $\displaystyle{\text{Slippage} = \frac{1}{2}\gamma\sigma\frac{X}{V}\left(\frac{\Theta}{V}\right)^{\frac{1}{...
0 votes
0 answers
81 views

Simplest portfolio optmization under transaction costs

I've been studying portfolio optimization trying to go step by step. After seeing much of Markowitz and Merton's work (Although I still don't get all of it), I would like to have acquire more ...
3 votes
1 answer
266 views

Payoff of European Call Option with Transactioncosts

I was wondering about the following scenario: assume that you have a underlying which trades under a positive bid-ask spread $S^B \leq S^A$ and that there is also a European Call-Option on this ...
5 votes
2 answers
320 views

Modeling transaction cost with single-counted turnover ratio

Why do people use "Single-Counted" turnover ratio when modeling for transaction cost. I read a paper (Factor Investing in the Corporate Bond Market) which uses only the purchase side as turnover ...
3 votes
1 answer
3k views

Portfolio optimization subject to transaction costs

Mean-Variance portfolio optimization attracted lots of attention in this forum so far. I am interested in the effect of incorporating transaction costs into the decision framework and I would like to ...
3 votes
1 answer
488 views

How large are transaction costs in practice?

I am wondering, what kind of transaction costs practitioners (institutional investors) are faced to. Portfolio optimization literature often evaluates portfolio performance after adjusting for a value ...
8 votes
4 answers
7k views

Typical coefficients uses in square-root model for market impact

The square-root model is widely used to model equity market impact. It assumes that volatility, traded volume, total volume, and a spread cost are the drivers of slippage. Jim Gatheral has an ...
1 vote
0 answers
167 views

What are commercial impact models and transaction cost analysis models out there for simulation?

I have heard that ITG, LiquidMetrix, MarkIT and TradingScreen has good Transaction Cost Analysis (TCA) research. I wonder which firm one would choose to have an impact model formula inside his ...
2 votes
1 answer
1k views

Transaction costs on option trades

It looks like the commissions alone for a non-index option trade is around 2-5%. For example, a BAC June ATM Call is currently trading at \$0.20; Interactive Brokers charges $0.7 per contract, which ...
3 votes
2 answers
314 views

When to adjust portfolio weights?

In portfolio allocation literature there is lot of effort made in obtaining 'better' portfolio weights, for example via improving parameter estimates, introducing Bayesian approaches, incorporating ...
7 votes
2 answers
174 views

How to properly assess the costs of replicating an index via futures contracts?

I would like to validate this sentence, coming from a WSJ article: The cost of holding a Eurostoxx 50 future, for example, has climbed from an average of 0.07% of the contract value since 1998, to an ...
0 votes
1 answer
58 views

Transaction Costs Measure ATOP: What does it mean and exactly measure?

I went through some presentations about LowVol strategies for some indices. In the presentations were tables with average returns, vola, Sharp ratio and ATOP. I have no clue what this ATOP is supposed ...
3 votes
1 answer
740 views

formulating MVO with costs

I am trying to formulate this simple MVO utility function with a linear transaction cost penalty added using Quadprog in MATLAB tcost = 0.001; lambda = 4; mu = vector of expected returns (say 4x1) S ...
2 votes
1 answer
831 views

How low can HFT transaction costs go?

When evaluating an HFT strategy, transaction costs are clearly an important question. When looking at commercial discount brokers for retail clients, costs can be as low as 0.005 USD per share, but ...
7 votes
3 answers
961 views

Transaction Costs for Currency Pairs

I have been aggregating some tick data from Oanda's streaming API to try and get an idea of the relative cost and best time to trade different currency pairs. The idea was to plot the spread of the ...
0 votes
1 answer
126 views

Liquidity and Prices

Do fewer transaction costs and higher liquidity relate to lower market prices? Are there any good resources that deal with these topics in more detail?
11 votes
3 answers
3k views

how do you evaluate an FX market EMS?

My firm is investigating FX EMS systems to see if we can reduce execution costs for our trading strategies that involve FX (not low latency). The liquidity providers are a few major banks. We're ...
2 votes
1 answer
292 views

Add transaction costs to prediction

An algorithm predicts price movement by some certainty and it invests proportional to the confidence level. Predictions range from -1 to +1, -1 meaning sell for a value of ...
3 votes
0 answers
330 views

Optimal Position Size with Transaction Costs given Forecast Mean and StDev

I have rather a challenging question. I'm hoping that someone can share their experience. I will build up the problem in steps. Let's start our thinking with the idea of a buy and hold strategy of ...
16 votes
3 answers
3k views

How to account for transaction costs in a simulated market environment?

I am simulating a market for my trading system. I have no ask-bid prices in my dataset and use adjusted close for both buy and sell price. To account for this I plan to use a relative transaction cost....