Measures of Implicit Trading Costs and Buy-Sell Asymmetry
WFA 2005 Portland Meetings Paper
29 Pages Posted: 27 Sep 2004 Last revised: 23 Nov 2010
Date Written: February 15, 2009
This paper shows that the widely documented buy-sell asymmetry in implicit institutional trading cost is mainly driven by mechanical characteristics of a specific class of measures: pre-trade measures. If a post-trade measure is used, the asymmetry is reversed in both rising and falling markets. Both pre-trade and post-trade measures are highly influenced by market movement, while during-trade measures are relatively neutral to market movement. We further show that a pre-trade measure can be decomposed into a market movement component and a during-trade measure, and empirically the market movement component is the dominant component. This paper demonstrates that simple mechanical characteristics of trading cost measures can have important implications for how we interpret empirical results.
Keywords: Institutional trading, Trading cost measurement, Buy-sell asymmetry, Implementation shortfall, VWAP
JEL Classification: G1, G2
Suggested Citation: Suggested Citation