Abstract
This article presents a framework for financial transaction cost analysis (TCA). We discuss the importance of properly distinguishing between a cost and a performance metric. We investigate implementation shortfall and arrival price costing methodologies and debate the value of each. We then introduce techniques to properly evaluate transaction performance using pre-trade estimates and z-score, market adjusted costs, relative performance measure (RPM), interval VWAP, and non-parametric statistical tests. <b>TOPICS:</b>Statistical methods, performance measurement, portfolio construction
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