Trading Costs

88 Pages Posted: 22 Aug 2018  

Andrea Frazzini

AQR Capital Management, LLC

Ronen Israel

AQR Capital Management, LLC

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Date Written: April 7, 2018

Abstract

Using 1.7 trillion dollars of live trade execution data from a large institutional money manager across 21 developed equity markets over a 19-year period, we measure the real-world trading costs and price impact function of a large trader. We provide a novel description of how costs vary across trade type, stock characteristics, trade size, time, and exchanges globally to test various theories of price impact. We find actual trading costs to be an order of magnitude smaller than previous studies suggest, and describe the trading process leading to these costs. A model calibrated to match the distribution of actual costs across trade size, stocks, and time outperforms other models from the literature in out of sample tests that attempt to describe independent costs from brokers and realized costs of traded index funds. Our model based on realized costs from live trades portrays very different implementation costs than previous studies suggest.

JEL Classification: G10, G12, G15

Suggested Citation

Frazzini, Andrea and Israel, Ronen and Moskowitz, Tobias J., Trading Costs (April 7, 2018). Available at SSRN: https://ssrn.com/abstract=3229719 or http://dx.doi.org/10.2139/ssrn.3229719

Andrea Frazzini

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203-742-3894 (Phone)
203-742-3394 (Fax)

HOME PAGE: http://www.econ.yale.edu/~af227/

Ronen Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Tobias J. Moskowitz (Contact Author)

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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