Publication Type

Working Paper

Version

publishedVersion

Publication Date

5-2009

Abstract

We propose and empirically examine a comprehensive measure of institutional trading frictions to include the dimensions of price impact, quantity of execution, return dynamics, speed of execution or order splitting, and trading commissions. Our empirical analysis reveals that various hidden components of institutional trading frictions such as adverse selection and clean-up costs are persistent and could add significantly to previously measured directly observable components of transaction costs. Our simultaneous system of equations accounts for the endogeniety in institutional order aggressiveness based on potentially superior information as well as order splitting strategies in the implementation stage to reduce transaction costs. Order aggressiveness, market conditions and other stock characteristics are associated with significant variations in trading frictions.

Keywords

Institutional trading, implementation shortfall, adverse selection, clean-up costs, price impact, transaction costs

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

First Page

1

Last Page

46

Additional URL

https://doi.org/10.2139/ssrn.1287215

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