How Instrument Costs Relate to Momentum Speed and Performance
Summary
The author investigates whether momentum performance and the preferred trading speed vary with instrument trading costs. Two competing ideas are considered: gross performance may be similar across instruments, leaving expensive markets less attractive after costs; alternatively, higher gross returns in expensive markets may offset those costs. A sample of 160 instruments is evaluated using six exponentially weighted moving average crossover speeds, with Sharpe ratio as the performance measure and log trading cost as a fitting variable.
The reported gross-return analysis finds no clear relationship between optimal speed and costs, though the estimates are noisy. Net performance suggests that expensive instruments often cannot support any tested momentum rule, while the fastest rule can be viable below a stated cost threshold. These results are exploratory: the document notes substantial variation and statistical noise, omits roll effects in one comparison, and gives no detailed tables or confidence intervals in the provided text. The evidence does not establish a causal link or a universal trading-speed policy.
Key ideas
- The analysis compares gross and net Sharpe ratios for momentum rules at different speeds across instruments with varied costs.
- Trading costs are transformed logarithmically because their observed range is very wide.
- Gross-return estimates show no clear relation between instrument costs and the preferred momentum speed.
- Net results indicate that high costs can make every tested momentum rule unattractive for an instrument.
- Noisy estimates and omitted roll effects constrain how broadly the findings can be applied.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.