Hi there, I'm looking for some further insight on gap return: the handout states we're doubling transaction costs, but I'm not sure I get it.
In the long-short strategy, we rebalanced our strategy daily, based on interday returns (day to day price variation).
But then we're saying we're opening and closing our positions daily: so, we're not just adjusting a portfolio, we're churning the entire portfolio twice here – and therefore costs will be considerably bigger.
Maybe I'm missing an important point?
Can't one simply rebalance at open in relation to the delta from close to open? Sorry for the long question
THanks
In the first implementation, the position is taken at the market close. And each day based on the close-to-close returns, the capital allocation to each stock is adjusted. We are not churning our entire portfolio daily only incremental buy/sell are made). Thus transaction cost is low.
One way to enhance this strategy is gap returns (or you can even think it as independent of the previous strategy)
In gap returns, we are converting the strategy to intraday (no overnight position). That is you take positions at market open and square off at the market close. Repeat again on next trading day. However, one drawback of this enhancement or change is that it increases the transaction cost. As you are churning your full portfolio daily.
Thanks