Retaining Alpha: The Effect of Trade Size and Rebalancing Frequency on FX Strategy Returns

Michael Melvin, Wenqiang Pan and Petra Wikstrom

No 8143, CESifo Working Paper Series from CESifo

Abstract: The literature on currency investing that incorporates transaction costs uses costs relevant for small trade sizes. Using the entire order book of the major electronic brokerages for FX, we compute sweep-to-fill costs for trades of different sizes and illustrate the reduction in post-cost returns as trade size increases. Researchers should consider trade size and frequency to create realistic forecasts of post-tcost returns to gauge the capacity of a strategy. We show how incorporating tcosts in the construction of a portfolio improves performance for both high and low frequency strategies and retains a larger portion of the alpha.

Keywords: transaction costs; FX microstructure; exchange rates; portfolio construction (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ifn, nep-mst and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp8143.pdf (application/pdf)

Related works:
Journal Article: Retaining alpha: The effect of trade size and rebalancing frequency on FX strategy returns (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8143

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().