[Fwd: Re: Re: [R-sig-finance] bid-ask bouse]

[Adrian Trapletti]

This time not as html
Adrian

-------- Original Message --------
Subject: 	Re: Re: [R-sig-finance] bid-ask bouse
Date: 	Wed, 29 Dec 2004 17:16:05 +0100
From: 	Adrian Trapletti <a.trapletti at bluewin.ch>
To: 	Joe Cerniglia <cj5815 at yahoo.com>
CC: 	r-sig-finance at stat.math.ethz.ch
References: 	<200412291140.iBTBcnek014626 at hypatia.math.ethz.ch>




>Message: 2
>Date: Tue, 28 Dec 2004 14:34:03 -0500
>From: David Kane <dave at kanecap.com>
>Subject: Re: [R-sig-finance] bid-ask bouse
>To: Joe Cerniglia <cj5815 at yahoo.com>
>Cc: r-sig-finance at stat.math.ethz.ch
>Message-ID: <16849.46379.161253.806415 at gargle.gargle.HOWL>
>Content-Type: text/plain; charset=us-ascii
>
>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
>
>  
>
Some more comments based on my experience:

    * Accurate estimation of fill prices from observed prices is maybe
      the most difficult task when simulating trading systems.
    * Slippage (>= 0) is a function of market momentum, number of
      shares, time of the day, market depth, and more specific
      properties such as liquidity of the considered instrument.
    * Some of the above measures may not be observed, in particular no
      history is available, e.g., for market depth.
    * Fill price = signal price +/- slippage (+ for buy orders, - for
      sell orders)
    * Signal price = bid/ask price (bid for sell orders, ask for buy
      orders) at the time an order is generated by the system or trader
    * To get an accurate estimate of the slippage function, a history of
      real trades is necessary.
    * In cases no bid/ask history is available, the slippage function
      may be based on last traded prices.
    * Published bid/ask prices may only be advertising quotes and nobody
      might be willing to trade on those prices.
    * Some markets close trading of shares when limit down is reached.

For some instruments it is possible to come up with a relatively simple 
and accurate slippage function, but this really depends...

Best
Adrian

>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
> > 
> > _______________________________________________
> > R-sig-finance at stat.math.ethz.ch mailing list
> > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
>
>
>
>  
>



-- 
Dr. Adrian Trapletti
Swiss-Systematic Asset Management AG
Militärstrasse 76
8004 Zürich
Switzerland

Phone :   +41 (0) 43 2433904
Fax :     +41 (0) 43 2433907
Mobile :  +41 (0) 76 3705631

Email :   adrian.trapletti at swiss-systematic.com
WWW :     www.swiss-systematic.com


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