Economics, Econometrics and Finance
4 years ago

New method reveals hidden risks in trading, impacting investor decisions.

The Journal of Portfolio Management
Measuring and Modeling Execution Cost and Risk
Robert Engle, F. Robert, Russell Jeffrey

Paper Summary

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The article discusses how financial markets can be considered liquid if trades can happen quickly and without affecting prices much. Most measures of trading costs only focus on average costs and don't consider the time it takes to trade. Recent research shows that the time it takes to trade adds a risk factor to the costs. The researchers developed a method to model both the expected cost and risk of trading, showing that the risk component is an important part of trading decisions.