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Estimating Trading Costs Using Econometric Models

Theory suggests that trading costs are related to various characteristics of the stock, the market and the trader. These include:

  • Liquidity
  • Risk
  • Size of trade (relative to liquidity)
  • Momentum
  • Trading style

These relationships can be fed into a nonlinear regression model to estimate trading costs prior to executing the trade. This can be useful both in helping a fund manager decide the proper size of a given order and also to compare the actual trading costs to the original estimate as a measure of execution quality.

For more information, see all articles on: Active Management, Economic Analysis, Institutional Investing, Investing in Stocks, Portfolio Management, Risk Management, Trading Execution

See also:
  • Econometric Modeling
  • Strengths and Weaknesses of Multi-Stage Dividend Discount Models
  • Trading Tactics
  • Implementation Shortfall
  • Algorithmic Trading Methods
    • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

    This entry was posted on Friday, January 4th, 2008 at 7:23 am and is filed under Active Management, Economic Analysis, Institutional Investing, Investing in Stocks, Portfolio Management, Risk Management, Trading Execution. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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