Estimating Equity Cost-Basis Distributions to Build Trading Factors

Summary

This short note outlines a way to represent the cost basis of stock holdings across market participants. It proposes estimating average holding cost by weighting transaction prices by traded quantities, then using daily costs and trading volume to estimate how shares are distributed across different cost levels. From that distribution, researchers can derive factors such as concentration, which describes how dispersed estimated costs are, and stability, which tracks how quickly the distribution changes.

The document provides a conceptual factor-construction outline but no equations, implementation details, data assumptions, trading rules, or empirical tests. It does not explain how to infer individual investor holdings from market-wide trades, so the resulting distribution depends on modeling choices and available data. The ideas can guide feature research, but the note alone does not establish predictive value or a usable strategy.

Key ideas

• Estimate average holding costs by weighting transaction prices by traded quantities.
• Use cost estimates and trading volume to model shares held at different price levels.
• Construct factors that measure the concentration or temporal stability of the modeled cost distribution.
• The note does not specify the data assumptions or validate the factors empirically.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.