Filled and Killed: Forecast and Realized Trading Costs Across Horizons from Global Equity and Fixed Income Portfolio Trades

Abstract

We analyze trading costs across regions and asset classes using unique data on 2,022 portfolio transitions from February 2016 to December 2023 comprising over USD 3.1 trillion in trade value. We find realized portfolio trading costs are consistent with pre-trade forecasts; even relatively large and complex trades can be executed at modest cost. We use count-data models to determine the optimal trade horizon as a function of portfolio characteristics. Trade horizons are similar across equities and fixed income, and increase with trade risk, value, and complexity. These results can be used by investors to better understand the potential capacity where urgency of trading is not a key determinant, and we apply the findings to estimating the capacity and transaction costs in factor-based strategies.

Keywords: Transition management, portfolio transitions, transaction costs, capacity, implementation shortfall, expected trading costs, impact function, pre-trade expected costs, trade horizon, count data model

JEL Classification: G11, G12, G20, G23