Trading & Rebalancing Flashcards
Explain the use of effective spread
if effective spread is less than the market bid-ask spread then it indicates good trade execution or a liquid security. effective spread is a measure of effective round trip cos of a transaction and reflects both price improvement and price impact
effective spread for a buy order =
= 2 x (execution price - midquote)
effective spread for a sell order =
= 2 x (midquote - execution price)
VWAP
volume-weighted average price of trade execution
implementation shortfall
= value of hypothetical portfolio executed at decision price - actual portfolio
= Opportunity cost + Fee + Delay cost + Market impact
gain or loss on the paper portfolio
total implementation shortfall
gain or loss on the real portfolio
actual ending value of the portfolio versus the actual expenditures, including costs
information-motivated traders
motivated by time-sensitive info
prefer time over price
prefer market orders over limit orders
value-motivated traders
motivated by security misvaluations
prefer price over time
prefer limit orders over market orders
Liquidity-motivated traders
motivated by reallocation & liquidity
prefer time over price
prefer market orders over limit orders
Passive traders
motivated by reallocation & liquidity
prefer price over time
prefer limit orders over market orders
In a trending market, how do rebalancing strategies compare?
CPPI > Buy & Hold > Constant Mix
In a mean-reverting market, how do rebalancing strategies compare?
Constant Mix > Buy & Hold > CPPI
Constant Proportion Portfolio Insurance (CPPI)
target equities investment = M x (port value - floor value)
M = constant proportion of cushion invested in equities (M > 1)
equities allocation increases as equity values increase
