Abstract:

This paper analyzes the issues commonly involved in estimating extra costs for immediate transactions. Based on the NYSE TAQ tick-by-tick data, we employ a nonparametric approach, the local median regression, to identify the unknown relationship between impact costs and several financial factors for a number of representative stocks traded in NASDAQ. The result shows that, for many stock transactions, there is a certain volume threshold of trading volume beyond which impact costs increase dramatically. We find that for 99% of trading, immediate execution is optimal.