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- Publisher Website: 10.1016/j.jfineco.2024.103886
- Scopus: eid_2-s2.0-85191159845
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Article: Importance of transaction costs for asset allocation in foreign exchange markets
Title | Importance of transaction costs for asset allocation in foreign exchange markets |
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Authors | |
Keywords | Asset allocation Carry trade Foreign exchange Mean–variance Optimization Price impact Realized Amihud Transaction costs |
Issue Date | 19-Jun-2024 |
Publisher | Elsevier |
Citation | Journal of Financial Economics, 2024, v. 159 How to Cite? |
Abstract | Transaction costs have a first-order effect on the performance of currency portfolios. Proportional costs based on quoted bid–ask spread are relatively small, but when a fund is large, costs due to the trading volume price impact are sizable and quickly erode returns, leaving many popular strategies unprofitable. A mean–variance-transaction-cost optimized approach (MVTC) that accounts for costs in the optimization efficiently tackles the problem with only relatively minor negative implications on before-cost profitability. MVTC is robust even when the price impact of trading is severe. Finally, we introduce an accurate extrapolation approach to expand the sample of the realized Amihud measure of Ranaldo and Santucci de Magistris (2022) from 12 to 26 currencies and from 2012 back in time to 1986. |
Persistent Identifier | http://hdl.handle.net/10722/344031 |
ISSN | 2023 Impact Factor: 10.4 2023 SCImago Journal Rankings: 13.655 |
DC Field | Value | Language |
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dc.contributor.author | Filippou, Ilias | - |
dc.contributor.author | Maurer, Thomas A | - |
dc.contributor.author | Pezzo, Luca | - |
dc.contributor.author | Taylor, Mark P | - |
dc.date.accessioned | 2024-06-25T03:30:01Z | - |
dc.date.available | 2024-06-25T03:30:01Z | - |
dc.date.issued | 2024-06-19 | - |
dc.identifier.citation | Journal of Financial Economics, 2024, v. 159 | - |
dc.identifier.issn | 0304-405X | - |
dc.identifier.uri | http://hdl.handle.net/10722/344031 | - |
dc.description.abstract | <p>Transaction costs have a first-order effect on the performance of currency portfolios. Proportional costs based on quoted bid–ask spread are relatively small, but when a fund is large, costs due to the trading volume price impact are sizable and quickly erode returns, leaving many popular strategies unprofitable. A mean–variance-transaction-cost optimized approach (MVTC) that accounts for costs in the optimization efficiently tackles the problem with only relatively minor negative implications on before-cost profitability. MVTC is robust even when the price impact of trading is severe. Finally, we introduce an accurate extrapolation approach to expand the sample of the realized Amihud measure of Ranaldo and Santucci de Magistris (2022) from 12 to 26 currencies and from 2012 back in time to 1986.</p> | - |
dc.language | eng | - |
dc.publisher | Elsevier | - |
dc.relation.ispartof | Journal of Financial Economics | - |
dc.subject | Asset allocation | - |
dc.subject | Carry trade | - |
dc.subject | Foreign exchange | - |
dc.subject | Mean–variance | - |
dc.subject | Optimization | - |
dc.subject | Price impact | - |
dc.subject | Realized Amihud | - |
dc.subject | Transaction costs | - |
dc.title | Importance of transaction costs for asset allocation in foreign exchange markets | - |
dc.type | Article | - |
dc.identifier.doi | 10.1016/j.jfineco.2024.103886 | - |
dc.identifier.scopus | eid_2-s2.0-85191159845 | - |
dc.identifier.volume | 159 | - |
dc.identifier.eissn | 1879-2774 | - |
dc.identifier.issnl | 0304-405X | - |