Estimating the profits from trading strategies |
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Authors: | Knez PJ; Ready MJ |
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Institution: | 1 University of Wisconsin-Madison and Northwestern University, USA
z Corresponding author at: University of Wisconsin-Madison, 975 University Avenue, Madison, WI 53706-1323, USA |
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Abstract: | Price improvement is the difference between the execution priceof an order and the quoted bid or ask when the order was submitted.We show that expected price improvement falls off dramaticallyas the size of the order approaches the quoted depth, and becomesnegative for larger orders. This is particularly important forsmall firms because the quoted depths are low. Using quotedspreads and depths and our estimate of expected price improvement,we show that trading strategies that attempt to exploit theweekly predictability of small-firm returns would be swampedby transaction costs. |
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