Optimal Transaction Filters under Transitory Trading Opportunities: Theory and Empirical Illustration

• Main Authors: Balvers, Ronald J., Wu, Yangru
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2004
• Subjects: Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research_smu/14; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1013&context=lkcsb_research_smu
• Institution: Singapore Management University

If transitory profitable trading opportunities exist, filter rules are used to mitigate transaction costs. We use a dynamic programming framework to design an optimal filter which maximizes after-cost expected returns. The filter size depends crucially on the degree of persistence of trading opportu...