Retaining Alpha: The Effect of Trade Size and Rebalancing Frequency on FX Strategy Returns
Michael Melvin (),
Wenqiang Pan and
No 8143, CESifo Working Paper Series from CESifo
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: G15 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mst and nep-ore
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