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Forecasting market impact costs and identifying expensive trades

Author

Listed:
  • Jacob A. Bikker

    (Supervisory Policy Division, Strategy Department, De Nederlandsche Bank, Amsterdam, The Netherlands)

  • Laura Spierdijk

    (Faculty of Economics and Business, Department of Economics and Econometrics, University of Groningen, Groningen, The Netherlands)

  • Roy P. M. M. Hoevenaars

    (Department of Quantitative Economics, Maastricht University, Financial and Risk Policy Department, ABP, Schiphol, The Netherlands)

  • Pieter Jelle Van der Sluis

    (Department of Finance and Financial Sector Management, GTAA Fund, ABP Investments, Vrije Universiteit Amsterdam, Schiphol, The Netherlands)

Abstract

Often, a relatively small group of trades causes the major part of the trading costs on an investment portfolio. Consequently, reducing the trading costs of comparatively few expensive trades would already result in substantial savings on total trading costs. Since trading costs depend to some extent on steering variables, investors can try to lower trading costs by carefully controlling these factors. As a first step in this direction, this paper focuses on the identification of expensive trades before actual trading takes place. However, forecasting market impact costs appears notoriously difficult and traditional methods fail. Therefore, we propose two alternative methods to form expectations about future trading costs. Applied to the equity trades of the world's second largest pension fund, both methods succeed in filtering out a considerable number of trades with high trading costs and substantially outperform no-skill prediction methods. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • Jacob A. Bikker & Laura Spierdijk & Roy P. M. M. Hoevenaars & Pieter Jelle Van der Sluis, 2008. "Forecasting market impact costs and identifying expensive trades," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(1), pages 21-39.
    • Handle: RePEc:jof:jforec:v:27:y:2008:i:1:p:21-39
    DOI: 10.1002/for.1052
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    References listed on IDEAS

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    Cited by:

    1. Jacob A. Bikker & Jeroen J. Meringa, 2022. "Have scale effects on cost margins of pension fund investment portfolios disappeared?," Applied Economics, Taylor & Francis Journals, vol. 54(39), pages 4501-4518, August.
    2. Saerom Park & Jaewook Lee & Youngdoo Son, 2016. "Predicting Market Impact Costs Using Nonparametric Machine Learning Models," PLOS ONE, Public Library of Science, vol. 11(2), pages 1-13, February.
    3. J.A. Bikker, 2013. "Is there an optimal pension fund size? A scale-economy analysis of administrative and investment costs," Working Papers 13-06, Utrecht School of Economics.
    4. Jacob A. Bikker, 2017. "Is THERE AN OPTIMAL PENSION FUND SIZE? A SCALE-ECONOMY ANALYSIS OF ADMINISTRATIVE COSTS," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(2), pages 739-769, June.
    5. J.A. Bikker, 2013. "Is there an optimal pension fund size? A scale-economy analysis of administrative and investment costs," Working Papers 13-06, Utrecht School of Economics.

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