What factors increase the risk of incurring high market impact costs?
Abstract:This article applies quantile regression to assess the factors that influence the risk of incurring high trading costs. Using data on the equity trades of the world's second largest pension fund in the first quarter of 2002, we show that trade timing, momentum, volatility and the type of broker intermediation are the major determinants of the risk of incurring high trading costs. Such risk is increased substantially by either high or low momentum and by strong volatility. Moreover, agency trades are substantially more risky in terms of trading costs than similar principal trades. Finally, we show that the quantile regression model succeeds well in forecasting future trading costs.
Document Type: Research Article
Affiliations: 1: De Nederlandsche Bank, Supervisory Policy Division, Strategy Department, NL-1000AB, Amsterdam 2: University of Groningen, Department of Economics & Econometrics, Faculty of Economics and Business, NL-9700 AV Groningen, The Netherlands 3: Vrije University, Department of Finance and Financial Sector Management, Amsterdam, The Netherlands and ABP Investments, Investments Research, NL-1118 ZX Schipol, The Netherlands
Publication date: February 1, 2010