A principled approach to clean-up costs in algo trading
The opportunity cost associated with the cancelled portion of an order is quantified
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The unbiased estimation of the cleanup cost – the opportunity cost associated with the cancelled portion of an order – is an essential component of transaction cost analysis in algorithmic trading. Petter Kolm and Nicholas Westray propose a practical and computationally efficient methodology to assign a value for the cleanup cost. This approach is also useful in other settings where market data needs to be properly adjusted for realised impact
Tracing its roots
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