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Transaction Costs and Returns to a Trading Strategy

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Market Timing with Moving Averages

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Abstract

This chapter starts with a review of transaction costs in capital markets. Then it demonstrates how to simulate the returns to a moving average trading strategy in the presence of transaction costs. The following two cases are considered when a trading indicator generates a sell signal: case one where the trader switches to cash, and case two where the trader alternatively sells short a financial asset.

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Notes

  1. 1.

    However, commissions for individual investors have dropped a lot after 2000. Unfortunately, we do not have an updated reference on recent commissions.

  2. 2.

    For example, large cap stocks are much more liquid than small cap stocks. As a result, not only the bid-ask spread for large cap stocks is less than that for small cap stocks, but also market impact costs for trading in large cap stocks are less than those for trading in small cap stocks.

  3. 3.

    Again, these references are probably outdated because after 2000 the liquidity in the stock markets has improved. Unfortunately, we do not have updated estimates on the average bid-ask spread in the stock markets. Therefore in our tests we employ the lower estimate for the average one-way transaction costs of 0.25%.

  4. 4.

    More exactly, since the transaction takes place at the close ask price \(P_t^\text {ask}=(1+\tau )P_t\), the return to the moving average strategy equals \(\frac{R_{t+1} - \tau }{1+\tau }\). However, since \(1+\tau \approx 1\), the expression \(R_{t+1} - \tau \) closely approximates the real return.

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Authors and Affiliations

  1. University of Agder, Kristiansand, Norway

    Valeriy Zakamulin

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  1. Valeriy Zakamulin
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Correspondence to Valeriy Zakamulin .

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Zakamulin, V. (2017). Transaction Costs and Returns to a Trading Strategy. In: Market Timing with Moving Averages. New Developments in Quantitative Trading and Investment. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-60970-6_6

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  • DOI: https://doi.org/10.1007/978-3-319-60970-6_6

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  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-319-60969-0

  • Online ISBN: 978-3-319-60970-6

  • eBook Packages: Economics and FinanceEconomics and Finance (R0)

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