Transaction Costs & Market Impact: Models & Analysis › Key Parameters
Michael BrenndoerferJanuary 8, 20261 min read
Quantitative FinanceAll chapters Part 14 of 15Strategy Development and Backtesting
Transaction Costs & Market Impact: Models & Analysis › Key ParametersOne section · Sections in this chapter9 / 16 ↓
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The key parameters for cost-aware strategy design are:
- Turnover: Annual trading volume as a percentage of portfolio value. The primary driver of total transaction costs.
- Cost per Trade: The average cost (explicit + implicit) incurred for each trade.
- Breakeven Cost: The transaction cost level at which a strategy's net alpha becomes zero.
- c: Transaction cost parameter in portfolio optimization. Acts as a penalty on rebalancing volume.
- ̒: Risk aversion parameter. Balances the trade-off between expected return and portfolio variance.