Cutting edge introduction: Hidden models for hidden costs

Sequencing trades optimally to reduce costs is a 50-year-old problem that is still unresolved because the costs themselves are tricky to predict. Academics at New York University apply an intuitive Bayesian technique to simplify the process

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Trading is not just about knowing which positions to take. Markets introduce friction in the form of transaction costs and larger trades have a tendency to push the market away – an effect called market impact. Sequencing trades optimally to reduce these costs is a computationally intensive process and most of the time firms end up doing it trade by trade instead.

In our first technical, Multiperiod portfolio selection and Bayesian dynamic models, Petter Kolm, a professor of mathematics at the

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