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Forecasting market impact costs and identifying expensive trades

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Author Info
Jacob A. Bikker (Supervisory Policy Division, Strategy Department, De Nederlandsche Bank, Amsterdam, The Netherlands)
Laura Spierdijk (Faculty of Economics and Business, Department of Economics and Econometrics, University of Groningen, Groningen, The Netherlands)
Roy P. M. M. Hoevenaars (Department of Quantitative Economics, Maastricht University, Financial and Risk Policy Department, ABP, Schiphol, The Netherlands)
Pieter Jelle Van der Sluis (Department of Finance and Financial Sector Management, GTAA Fund, ABP Investments, Vrije Universiteit Amsterdam, Schiphol, The Netherlands)

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Abstract

Often, a relatively small group of trades causes the major part of the trading costs on an investment portfolio. Consequently, reducing the trading costs of comparatively few expensive trades would already result in substantial savings on total trading costs. Since trading costs depend to some extent on steering variables, investors can try to lower trading costs by carefully controlling these factors. As a first step in this direction, this paper focuses on the identification of expensive trades before actual trading takes place. However, forecasting market impact costs appears notoriously difficult and traditional methods fail. Therefore, we propose two alternative methods to form expectations about future trading costs. Applied to the equity trades of the world's second largest pension fund, both methods succeed in filtering out a considerable number of trades with high trading costs and substantially outperform no-skill prediction methods. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1052
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 27 (2008)
Issue (Month): 1 ()
Pages: 21-39
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:jof:jforec:v:27:y:2008:i:1:p:21-39

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Chan, Louis K C & Lakonishok, Josef, 1997. " Institutional Equity Trading Costs: NYSE versus Nasdaq," Journal of Finance, American Finance Association, vol. 52(2), pages 713-35, June. [Downloadable!] (restricted)
  2. Donald B. Keim & Ananth Madhavan, . "The Cost of Institutional Equity Trades," Rodney L. White Center for Financial Research Working Papers 8-98, Wharton School Rodney L. White Center for Financial Research.
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  3. repec:fth:pennfi:68 is not listed on IDEAS
  4. Chan, Louis K C & Lakonishok, Josef, 1995. " The Behavior of Stock Prices around Institutional Trades," Journal of Finance, American Finance Association, vol. 50(4), pages 1147-74, September. [Downloadable!] (restricted)
  5. Jacob A. Bikker & Laura Spierdijk & Pieter Jelle van der Sluis, 2004. "Market Impact Costs of Institutional Equity Trades," DNB Staff Reports (discontinued) 125, Netherlands Central Bank. [Downloadable!]
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