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Primary Article

The Impact of an Increase in Volatility on Trading Costs

Dmitry Rakhlin and George Sofianos
The Journal of Trading Spring 2006, 1 (2) 43-50; DOI: https://doi.org/10.3905/jot.2006.628194
Dmitry Rakhlin
A Vice President, One Delta Strategies, at Goldman, Sachs & Co.
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  • For correspondence: dmitry.rakhlin@gs.com
George Sofianos
Vice President, Equity Execution Strategies, at Goldman, Sachs & Co.
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  • For correspondence: george.sofianos@gs.com
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Abstract

The current low volatility environment keeps trading costs low. But what if volatility increases? In this paper, we discuss how an increase in volatility will affect execution strategies and estimate its impact on portfolio trading costs. We derive our estimates by simulating the Goldman Sachs PortX algorithm. PortX derives the optimum execution strategy by balancing the cost-risk trade-off and therefore allows us to examine how an increase in volatility changes the optimum strategy. Our simulations suggest that doubling volatility will increase the expected trading cost on large cap portfolios by 20% to 25% (depending on trading aggressiveness) and by almost 50% on small cap portfolios. In our simulations, doubling volatility increases trading costs both directly (for a fixed execution horizon) and indirectly: the resulting increase in execution risk reduces the optimum execution horizon further increasing trading costs.

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The Journal of Trading
Vol. 1, Issue 2
Spring 2006
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The Impact of an Increase in Volatility on Trading Costs
Dmitry Rakhlin, George Sofianos
The Journal of Trading Mar 2006, 1 (2) 43-50; DOI: 10.3905/jot.2006.628194

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The Impact of an Increase in Volatility on Trading Costs
Dmitry Rakhlin, George Sofianos
The Journal of Trading Mar 2006, 1 (2) 43-50; DOI: 10.3905/jot.2006.628194
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