Measuring and Modeling Execution Cost and Risk

30 Pages Posted: 3 Nov 2008

See all articles by Robert F. Engle

Robert F. Engle

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); New York University (NYU) - Volatility and Risk Institute

Robert Ferstenberg

Morgan Stanley

Jeffrey R. Russell

University of Chicago - Booth School of Business - Econometrics and Statistics

Multiple version iconThere are 3 versions of this paper

Date Written: April 2006

Abstract

We introduce a new analysis of transaction costs that explicitly recognizes the importance of the timing of execution in assessing transaction costs. Time induces a risk/cost tradeoff. The price of immediacy results in higher costs for quickly executed orders while more gradual trading results in higher risk since the value of the asset can vary more over longer periods of time. We use a novel data set that allows a sequence of transactions to be associated with individual orders and measure and model the expected cost and risk associated with different order execution approaches. The model yields a risk/cost tradeoff that depends upon the state of the market and characteristics of the order. We show how to assess liquidation risk using the notion of liquidation value at risk (LVAR).

Suggested Citation

Engle, Robert F. and Ferstenberg, Robert and Russell, Jeffrey R., Measuring and Modeling Execution Cost and Risk (April 2006). NYU Working Paper No. FIN-07-044, Available at SSRN: https://ssrn.com/abstract=1293627

Robert F. Engle (Contact Author)

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Robert Ferstenberg

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

Jeffrey R. Russell

University of Chicago - Booth School of Business - Econometrics and Statistics ( email )

Chicago, IL 60637
United States
773-834-0720 (Phone)
773-702-0458 (Fax)

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