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Transaction Costs And Market Impact In Investment Management

Author

Listed:
  • Marek Kociñski

    (Faculty of Applied Informatics and Mathematics, Warsaw University of Life Sciences-SGGW)

Abstract

The aim of this article is to analyse the major sources of transaction costs in financial markets, in particular to find the amounts of such costs on the Warsaw Stock Exchange (WSE). Sources of transaction costs are considered: commissions, bid-ask spread and market impact. The commissions are only briefly described since they are explicitly stated and easily measured. More attention is paid to the bid-ask spread which is one of the main causes of trading costs. It is shown that the investor who wants to outperform the Polish market should usually expect a much higher bid-ask spread than it follows from the officially used calculations. Then it is demonstrated how historical spreads can be used in predicting their future values. This seems to be important from the practical point of view, since forecasting trading costs is a compelling task for financial managers. Next, market impact and market impact costs are considered. The practical method of measuring these is applied and discussed.

Suggested Citation

  • Marek Kociñski, 2014. "Transaction Costs And Market Impact In Investment Management," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 10(4), pages 28-35, May.
    • Handle: RePEc:rze:efinan:v:10:y:2014:i:4:p:28-35
    as

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    File URL: http://e-finanse.com/artykuly_eng/290.pdf
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    References listed on IDEAS

    as
    1. Nicolae Gârleanu & Lasse Heje Pedersen, 2013. "Dynamic Trading with Predictable Returns and Transaction Costs," Journal of Finance, American Finance Association, vol. 68(6), pages 2309-2340, December.
    2. Yakov Amihud & Haim Mendelson, 2013. "Transaction Costs and Asset Management," Palgrave Macmillan Books, in: Michael Pinedo & Ingo Walter (ed.), Global Asset Management, chapter 22, pages 414-432, Palgrave Macmillan.
    3. Ha-Young Kim & Frederi Viens, 2012. "Portfolio optimization in discrete time with proportional transaction costs under stochastic volatility," Annals of Finance, Springer, vol. 8(2), pages 405-425, May.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    transaction costs; bid-ask spread; market impact Least Squares Method;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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