Financial Education

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