Optimal Transaction Filters Under Transitory Trading Opportunities: Theory and Empirical Illustration
Ronald Balvers () and
Yangru Wu ()
No 22005, Working Papers from Hong Kong Institute for Monetary Research
If transitory profitable trading opportunities exist, filter rules are used to mitigate transaction costs. We use a dynamic programming framework to design an optimal filter which 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. Applying our theory to daily dollar-yen exchange trading, we find that the optimal filter can be economically significantly different from a naive filter equal to the transaction cost. The candidate trading strategies generate positive returns that disappear after accounting for transaction costs. However, when the optimal filter is used, returns after costs remain positive and are higher than for naive filters.
Keywords: Transaction Costs; Filter Rules; Trading Strategies; Foreign Exchange (search for similar items in EconPapers)
JEL-codes: G10 G15 G11 (search for similar items in EconPapers)
Pages: 36 pages
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 500 Internal Server Error (http://www.hkimr.org/uploads/publication/236/ub_full_0_2_101_wp200502_text.pdf [301 Moved Permanently]--> http://www.aof.org.hk/research/HKIMR/uploads/publication/236/ub_full_0_2_101_wp200502_text.pdf [301 Moved Permanently]--> https://www.aof.org.hk/research/HKIMR/uploads/publication/236/ub_full_0_2_101_wp200502_text.pdf)
Journal Article: Optimal transaction filters under transitory trading opportunities: Theory and empirical illustration (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:hkm:wpaper:022005
Access Statistics for this paper
More papers in Working Papers from Hong Kong Institute for Monetary Research Contact information at EDIRC.
Bibliographic data for series maintained by HKIMR ().