Investing and Trading Consistency

Abstract

1. Robert Kissell 1. Vice president, global execution services at JPMorgan Chase in New York, NY. (robert.kissell{at}jpmchase.com) 2. Roberto Malamut 1. A quantitative analyst at SAC Capital Management in New York, NY. (roberto.malamut{at}jpmchase.com) We introduce a framework to ensure consistency between the investment and trading decisions. We provide a methodology to determine the single “best execution” trading strategy given the goals and objectives of the fund. We show that the appropriate level of “risk aversion” for transaction cost optimization is equal to the Sharpe ratio of the fund. We demonstrate that an ultra aggressive strategy (e.g., principal bid) and ultra passive strategy (e.g., VWAP) may equivalent strategies (with respect to overall performance) and both of these strategies may in result in sub-par performance and decreased investor utility. Finally, we provide insight into the stock selection process and show that an initially optimal portfolio may in fact be suboptimal after accounting for transaction costs and that investors may be better off selecting an ex-ante suboptimal portfolio to improve long-run performance TOPICS: [Fundamental equity analysis][1], [performance measurement][2], [portfolio construction][3] [1]: https://www.pm-research.com/topic/fundamental-equity-analysis [2]: https://www.pm-research.com/topic/performance-measurement-0 [3]: https://www.pm-research.com/topic/portfolio-construction