Retaining Alpha: The Effect of Trade Size and Rebalancing Frequency on FX Strategy Returns

49 Pages Posted: 11 Mar 2020

See all articles by Michael Melvin

Michael Melvin

University of California, San Diego (UCSD) - Rady School of Management; CESifo (Center for Economic Studies and Ifo Institute)

Wenqiang Pan

Columbia University - Columbia Business School

Petra Wikstrom

Streamline Analytix LLC

Date Written: 2020

Abstract

The literature on currency investing that incorporates transaction costs uses costs relevant for small trade sizes. Using the entire order book of the major electronic brokerages for FX, we compute sweep-to-fill costs for trades of different sizes and illustrate the reduction in post-cost returns as trade size increases. Researchers should consider trade size and frequency to create realistic forecasts of post-tcost returns to gauge the capacity of a strategy. We show how incorporating tcosts in the construction of a portfolio improves performance for both high and low frequency strategies and retains a larger portion of the alpha.

Keywords: transaction costs, FX microstructure, exchange rates, portfolio construction

JEL Classification: G150, F310

Suggested Citation

Melvin, Michael and Pan, Wenqiang and Wikstrom, Petra, Retaining Alpha: The Effect of Trade Size and Rebalancing Frequency on FX Strategy Returns (2020). CESifo Working Paper No. 8143, Available at SSRN: https://ssrn.com/abstract=3552383

Michael Melvin (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Wenqiang Pan

Columbia University - Columbia Business School ( email )

New York, NY
United States

Petra Wikstrom

Streamline Analytix LLC ( email )

New York, NY 10011
United States

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