Optimal transaction filters under transitory trading opportunities: Theory and empirical illustration

Ronald Balvers and Yangru Wu ()

Journal of Financial Markets, 2010, vol. 13, issue 1, 129-156

Abstract: If transitory profitable trading opportunities exist, transaction filters mitigate trading costs. We use a dynamic programming framework to design an optimal filter that maximizes after-cost expected returns. The filter size depends crucially on the degree of persistence of trading opportunities, transaction cost, and standard deviation of shocks. For daily dollar-yen exchange trading, the optimal filter can be economically significantly different from a naïve filter equal to the transaction cost. The candidate trading strategies generate positive returns that disappear after transaction costs. However, when the optimal filter is used, returns after costs remain positive and higher than for naïve filters.

Keywords: Transaction; costs; Transaction; filters; Trading; strategies; Foreign; exchange (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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Working Paper: Optimal Transaction Filters Under Transitory Trading Opportunities: Theory and Empirical Illustration (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:13:y:2010:i:1:p:129-156

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