[R-sig-finance] bid-ask bouse

[David Kane]

I am not sure if this is the appropriate list for your question, but,
since I don't know a better list, here are my thoughts.

1) In order to provide a decent answer, we need to know *much* more
about the strategy. Start by telling us the typical holding period,
the universe of stocks included and the dates for the historical data.

2) Replace "return" in your code with some measure of return adjusted
for bid/ask spread. If you are using daily returns and a daily holding
period (which probably wouldn't be such a great idea, but ignore that
for now), you could just subtract the spread from the return for
puchases while adding it to returns for shorts. Again, that has
nothing to do with R, but seems reasonable enough.

3) More sophisticated answers would involve measuring returns from
offer to bid for buys and bid to offer for shorts. Again, it would be
helpful to know precisely what sort of data you are working with.

Best of luck. Although your question has nothing to do with R, you are
wise to be using R for applied finance. There is no better tool.

Dave Kane


Joe Cerniglia writes:
 > 
 > I am trying to test a strategy on small cap stocks in
 > R.  I am concerned that the bid-ask bounce is
 > contributed to the excess return generated by the
 > strategy.  How can I adjust the calculation of the
 > returns on my portfolio to account for the bid-ask
 > spread?
 > 
 > Joe
 > 
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