GUTMANN CENTER FOR PORTFOLIO MANAGEMENT
at the University of Vienna - http//:www.gutmann-center.at
invites to the following
PUBLIC LECTURE:
(Apologies for any cross-listings!):
Date: June 29th, 2006 - 4.00 p.m.
Location: Bank Gutmann AG, Schwarzenbergplatz 16, 1010 Wien
Speaker: Prof. Dr. Ananth MADHAVAN, Barclays Global Investors (BGI)
Title: TRANSACTION COST MODELING AS A SOURCE OF ALPHA
Abstract
The impact of realized transaction costs on portfolio performance is now
well recognized. Less well understood, however, is the effect of
transaction cost on performance in the pre-trade dimension. Intuitively,
transaction costs affects performance through the choice of bets the
manager undertakes (breadth), the frequency of bets (turnover), and the
size of those bets (order size). We show that transaction cost modeling
is a source of alpha, increasing skill and breadth. Specifically,
accurate transaction cost models allow managers to make better decisions
regarding which securities should or should not be traded, and the
optimal size of the trade. Further, improved forecasts of costs are
critical to determining optimal portfolio turnover. Greater turnover
allows for more active bets, increasing breadth, but magnifies the
impact of trading costs. Balancing these considerations appropriately
yields an optimal turnover level. Transaction cost models thus help
reduce not only realized costs, but also improve performance on an ex
ante basis. The analysis provides insights into the determinants of
optimal fund capacity. We show that capacity problems are manifested
gradually in the form of higher expected costs, reduced breadth, and
lower turnover. Capacity is an elastic concept that is surprisingly
responsive to even relatively modest gains in transaction cost control
or forecasting ability. This suggests that fund managers can influence
their capacity through investments in better execution research and
technology.
About Ananth Madhavan:
Ananth Madhavan is the Global Head of Trading Research at BGI. He leads
BGI's global trading research team with a focus on execution research
and trading strategies across different asset classes worldwide. Prof.
Madhavan also works closely with the global trading team and BGI’s alpha
research and product groups to design and implement trading strategies
capturing liquidity-driven market opportunities. Before joining BGI in
2003, Prof. Madhavan was Managing Director of Research of ITG, Inc. and
a member of the firm’s management and executive committees. Previously,
he was the Charles B. Thorton Professor of Finance at the Marshall
School of Business at the University of Southern California, and
Assistant Professor of Finance at the Wharton School of the University
of Pennsylvania. Ananth Madhavan is the author of numerous publications
in leading academic and practitioner journals. He received his PhD in
Economics from Cornell University and BA from the University of Delhi,
India.
Please REGISTER:
Mail: gutmann.bwl(a)univie.ac.at
Phone: +43-1-4277-38186 - Fax: +43-1-4277-38074
Contact and further information:
Gutmann Center for Portfolio Management
University of Vienna - Mag. Dorothea GRIMM
Bruenner Str. 72 - 1210 Wien (Austria)
phone: +43-1-4277-38186 - fax: +43-1-4277-38074
mail: gutmann.bwl(a)univie.ac.at - web:
www.gutmann-center.at