Speed and Dimensions of Trading

Journal of Investment Strategies, Vol.7(1), December 2017, pp.85-106

29 Pages Posted: 15 Mar 2016 Last revised: 4 Jan 2018

See all articles by Boris Gnedenko

Boris Gnedenko

affiliation not provided to SSRN

Igor Yelnik

Alphidence Capital Ltd

Date Written: March 10, 2016

Abstract

How much risk does an investment portfolio turn over in a given period of time? In other words, how aggressively does it trade in terms of changing exposure to underlying risks? Rather surprisingly, the investment community still lacks a consistent definition that measures this important portfolio property. We argue that conventional portfolio turnover, which quantifies trading intensity in nominal terms, does not serve this purpose well enough. We introduce an alternative measure that we call Risk-based Portfolio Turnover, which, loosely speaking, represents the overall risk traded.

We also suggest a notion of Effective Number of Trades (ENT), which targets a related, but different question: how often does a portfolio make bets? Finally, we decompose trading activity by orthogonal axes and introduce the notion of Effective Number of Trading Dimensions (ENTD).

Both ENT and ENTD are invariant to linear transformations in a space of portfolio assets, which makes these two metrics important intrinsic portfolio characteristics. The paper is complemented with the R code for computing all the above measures.

Keywords: turnover, portfolio, trading speed, trading activity, trading intensity, trading frequency, trading strategy, principal trading directions, trading dimensions, principal component analysis, entropy, volatility, Euclidian distance

JEL Classification: G10, G11, G15

Suggested Citation

Gnedenko, Boris and Yelnik, Igor, Speed and Dimensions of Trading (March 10, 2016). Journal of Investment Strategies, Vol.7(1), December 2017, pp.85-106, Available at SSRN: https://ssrn.com/abstract=2745278 or http://dx.doi.org/10.2139/ssrn.2745278

Boris Gnedenko (Contact Author)

affiliation not provided to SSRN

Igor Yelnik

Alphidence Capital Ltd ( email )

London

HOME PAGE: http://alphidence.capital

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