Optimal Turnover, Liquidity, and Autocorrelation

Bastien Baldacci, Jerome Benveniste and Gordon Ritter

Papers from arXiv.org

Abstract: The steady-state turnover of a trading strategy is of clear interest to practitioners and portfolio managers, as is the steady-state Sharpe ratio. In this article, we show that in a convenient Gaussian process model, the steady-state turnover can be computed explicitly, and obeys a clear relation to the liquidity of the asset and to the autocorrelation of the alpha forecast signals. Indeed, we find that steady-state optimal turnover is given by $\gamma \sqrt{n+1}$ where $\gamma$ is a liquidity-adjusted notion of risk-aversion, and $n$ is the ratio of mean-reversion speed to $\gamma$.

Date: 2021-10, Revised 2022-01
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2110.03810

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