Modelling VWAP Slippage with HFT data

I heard that VWAP slippage (relative difference between the VWAP and the initial mid-price, $varepsilon . frac{P_{VWAP}-P_{arrival}}{P_{arrival}}$ with $varepsilon = +1 or -1 $ the trade sign) could be modelled as a function of volume, spread and volatility. Have you ever had experience for that?

Thank you for your guidance.

Quantitative Finance Asked on December 31, 2020

1 Answers

One Answer

Usually the the difference between your average price between $t_0$ and $T$ and the price at $t_0$ is called the Implementation Shortfall (IS).

They are a lot of references to do this, just cite these two ones:

This Figure comes from the second paper (you see how it is square-rooted): enter image description here

The formula is, for a traded quantity $Q$ $$IS(Q)simeq a cdot phi + b cdotsigmasqrt{frac{Q}{rm ADV}},$$ where

  • $phi$ is the bid-ask spread
  • $sigma$ is the volatility
  • $rm ADV$ is the Average Daily Volume on the instrument.

$a$ and $b$ are two constants to be calibrated on your data. Typically: $a$ corresponds to your trading skills (if you are very smart in good liquidity chasing and if you have good execution predictors, $a$ can be close to 20%), and $b$ is somehow universal.

[EDIT] last paragraph removed (following @mbz0 remark).

Answered by lehalle on December 31, 2020

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