Implementation Shortfall with Transitory Price Effects

Appeared in David Easley, Marcos López de Prado, and Maureen O'Hara, 2013, editors, "High-Frequency Trading: New Realities for Traders, Markets and Regulators."

Columbia Business School Research Paper No. 18-31

24 Pages Posted: 13 Mar 2018

See all articles by Terrence Hendershott

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Charles M. Jones

Columbia Business School

Albert J. Menkveld

VU Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: March 18, 2013

Abstract

Regulators and some large investors have recently raised concerns about temporary or transitory volatility in highly automated financial markets. It is far from clear that high-frequency trading, fragmentation, and automation are contributing to transitory volatility, but some institutions complain that their execution costs are increasing. In this chapter, we introduce a methodology for decomposing the price process of a financial instrument into its permanent and transitory components, and we explore the insights from applying this methodology to execution cost measurement. Among other things, our methodology allows an institutional investor to accurately measure the contributions of transitory price movements to its overall trading costs. The methodology is particularly applicable to an investor that splits a large order into small pieces and executes it gradually over time.

Keywords: Implementation shortfall, volatility decomposition, institutional investor

JEL Classification: G23

Suggested Citation

Hendershott, Terrence J. and Jones, Charles M. and Menkveld, Albert J., Implementation Shortfall with Transitory Price Effects (March 18, 2013). Appeared in David Easley, Marcos López de Prado, and Maureen O'Hara, 2013, editors, "High-Frequency Trading: New Realities for Traders, Markets and Regulators."; Columbia Business School Research Paper No. 18-31. Available at SSRN: https://ssrn.com/abstract=3137570 or http://dx.doi.org/10.2139/ssrn.3137570

Terrence J. Hendershott

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Charles M. Jones

Columbia Business School ( email )

3022 Broadway
Uris Hall Rm 101
New York, NY 10027
United States
(212) 854-4109 (Phone)

HOME PAGE: http://https://www8.gsb.columbia.edu/cbs-directory/detail/cj88

Albert J. Menkveld (Contact Author)

VU Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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