Measures of implicit trading costs and buy-sell asymmetry

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25 Citations (Scopus)

Abstract

This paper shows that the widely documented buy-sell asymmetry in implicit institutional trading cost is mainly driven by mechanical characteristics of a specific class of measures: pre-trade measures. If a post-trade measure is used, the asymmetry is reversed in both rising and falling markets. Both pre-trade and post-trade measures are highly influenced by market movement, while during-trade measures are relatively neutral to market movement. I further show that a pre-trade measure can be decomposed into a market movement component and a during-trade measure, and empirically the market movement component is the dominant component. This paper demonstrates that simple mechanical characteristics of trading cost measures can have important implications for how empirical results are interpreted.
Original languageEnglish
Pages (from-to)418-437
Number of pages20
JournalJournal of Financial Markets
Volume12
Issue number3
DOIs
Publication statusPublished - 1 Aug 2009
Externally publishedYes

Keywords

  • Buy-sell asymmetry
  • Implementation shortfall
  • Institutional trading
  • Trading cost measurement
  • VWAP

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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