Managing Transaction Costs in a Dynamic Trading Strategy

2015 ◽  
Author(s):  
James A. Sefton ◽  
Sylvain Champonnois
Keyword(s):  
Transaction Costs ◽  
Trading Strategy ◽  
Dynamic Trading

scholarly journals Lead-Lag Relationships in International Stock Markets Revisited: Are They Exploitable?

2017 ◽  
Vol 9 (1) ◽  
pp. 8
Author(s):  
Andreas Gruener ◽  
Christian Finke
Keyword(s):  
Transaction Costs ◽  
Stock Markets ◽  
Abnormal Returns ◽  
Institutional Ownership ◽  
Return Predictability ◽  
Trading Strategy ◽  
Analyst Coverage ◽  
Developed Markets ◽  
Stock Portfolios ◽  
International Stock Markets

This paper re-examines empirical lead-lag relationships in stock portfolios sorted by size, analyst coverage and institutional ownership across seven major developed markets. We find that lead-lag relationships continue to exist in a majority of countries. A simple trading strategy that exploits the return predictability based on lead-lag relationships yields significant abnormal returns in several markets. However, the abnormal returns quickly decline when transaction costs are introduced and become insignificant for one-way transaction costs of more than 40 basis points. Thus, lead-lag relationships are probably not exploitable in practice and will continue to exist in the future.

Cross-Listing and Arbitrage without Overlapping Time

2013 ◽  
pp. 206-225
Keyword(s):  
Hong Kong ◽  
Stock Market ◽  
Transaction Costs ◽  
Equity Markets ◽  
Trading Strategy ◽  
Chinese Firms ◽  
Simple Strategy ◽  
Cross Listing ◽  
Monthly Return

Chinese firms tend to cross-list in different equity markets. The first wave of studies after the re-establishment of the stock market in the early 1990s indicated that cross-listing practices do not necessarily translate into arbitrage profit. This chapter examines the possibility of arbitrage profits for 14 cross-listed Chinese stocks traded on both their home exchanges (Hong Kong Main Board) and NYSE in the form of ADRs without overlapped trading hours. A simple trading strategy was developed with the consideration of four scenarios. The results indicate that a monthly return from 0.5 percent to 3.8 percent could be obtained using the simple strategy when transaction costs are considered.

PROFITABILITY OF A SIMPLE PAIRS TRADING STRATEGY: RECENT EVIDENCES FROM A GLOBAL CONTEXT

2016 ◽  
Vol 19 (04) ◽  
pp. 1650023
Author(s):  
JIA MIAO ◽  
JASON LAWS
Keyword(s):  
Transaction Costs ◽  
Investment Strategy ◽  
Trading Strategy ◽  
Trading Rule ◽  
Pairs Trading ◽  
Working Paper ◽  
Bear Markets ◽  
Relative Value ◽  
Trading Profits ◽  
Market Indexes

Pairs trading strategy is a popular investment strategy, where traders long one stock and short the other stock. The trading profits are expected to be “immune” to any market conditions: being uptrend, downtrend, or sideways, instead the performance is determined by the relative performance of the pair. Following Gatev et al. [(1999) Pairs Trading: Performance of a Relative-Value Arbitrage Rule. Working Paper, Yale School of Management; (2006) Pairs trading: Performance of a relative-value arbitrage rule, The Review of Financial Study, 19, 797–827] and Do & Faff [(2010) Does simple pairs trading still work? Financial Analyst Journal, 66, 1–12], we examine whether the simple pairs trading rule is also profitable in markets outside of the US. We also examine whether the trading rule performs consistently during bull and bear markets, including the recent period of market turbulence. Our results show that in most countries, the strategy generates positive returns, without evidence of under performance during bear markets. Unlike prior research, we do not find that the trading profits diminish over recent years. The pairs trading strategy generates positive returns even after transaction costs. However, the returns deteriorate significantly at a higher level of transaction costs. It is also found that the correlation between the returns on our pairs trading portfolios and the returns on the corresponding stock market indexes is low, confirming its role as a diversifier to the traditional long only investments.

scholarly journals Dynamic Trading with Predictable Returns and Transaction Costs

2013 ◽  
Vol 68 (6) ◽  
pp. 2309-2340 ◽  
Author(s):  
NICOLAE GÂRLEANU ◽  
LASSE HEJE PEDERSEN
Keyword(s):  
Transaction Costs ◽  
Dynamic Trading ◽  
Predictable Returns

Shall we buy and hold? Evidence from Asian real estate markets

2014 ◽  
Vol 32 (2) ◽  
pp. 168-186 ◽  
Author(s):  
Eddie Hui ◽  
Philip Yam ◽  
John Wright ◽  
Kevin Chan
Keyword(s):  
Hong Kong ◽  
Real Estate ◽  
Transaction Costs ◽  
Real Life ◽  
Graphical Analysis ◽  
Trading Strategy ◽  
Content Type ◽  
Real Estate Markets ◽  
Asian Economies ◽  
New Finding

Purpose – The purpose of this study is to verify whether the trading strategy can beat the “buy-and-hold” strategy for the securitized real estate indices of six Asian economies: Hong Kong, China, Japan, Taiwan, Thailand and Malaysia. Design/methodology/approach – This paper constructs a trading strategy from the Shiryaev-Zhou index and tests the strategy on the securitized real estate indices of six emerging Asian economies: Hong Kong, China, Japan, Taiwan, Thailand and Malaysia. The authors compare the resulting profits from using the trading strategy with the resulting profits from using the “buy-and-hold” strategy. The authors consider three cases: no transaction costs, 0.1 percent transaction costs, and 0.2 percent transaction costs. Findings – The results show that the trading strategy the authors constructed generally outperforms the “buy-and-hold” strategy even in the presence of transaction costs. In particular, the authors have a new finding as follows: Thailand and Malaysia's securitized real estate indices fell drastically during the period of observation. However, applying the trading strategy to these two securitized real estate indices can still earn a profit. Practical implications – The trading strategy is particularly useful in protecting investors from huge loss in adverse market conditions. The results can be applied to the field of finance/investment that investors can construct a trading strategy similar to the authors to earn more profits. Originality/value – This study will consider cases where both buying and selling costs exist, so the scenario is more like stock transactions in real-life equity markets. Furthermore, in this paper, for each securitized real estate index, the authors plot a graph to show the holding and non-holding periods under the trading strategy. This would help the authors explain the resulting profit under the trading strategy. This kind of graphical analysis was neglected by Hui and Yam.

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