A practical framework for estimating transaction costs and developing optimal trading strategies to achieve best execution [An article from: Finance Research Letters]

This digital document is a journal article from Finance Research Letters, published by Elsevier in 2004. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
In this paper we provide both a decision framework to estimate transaction costs and develop optimal trading strategies to achieve best execution. The methodology is based on an unbundling approach whereby costs are categorized into transparent and hidden, and fixed and variable components. The classification serves as the foundation for developing execution strategies for a fund's implementation goals. For example, the methodology easily adapts to strategies aimed at preserving asset value, achieving the closing price or volume weighted average price (''VWAP''), and minimizing tracking error. Further, we show how to determine the best execution strategy (''BES'') from a set of optimal strategies given a fund's goal and objectives via a set of decision-making criteria. Ultimately, best execution translates to lower transaction costs and higher portfolio returns.