Editor’s Letter

Abstract

DaviD anTin CEO Dave BliDe Publisher We open the Spring issue with Mozes and Steffens, who introduce a model for forecasting future volatility using fundamental factors. These fundamental factors include the extent to which the market’s valuation deviates from its predicted value, the losses reported by companies with negative earnings, projected earnings growth rates, and Treasury bill rates. Chung and Kissell then propose a transaction cost analysis portfolio optimization procedure that incorporates transaction costs directly into the problem of the objective function of portfolio optimization. Their results show that a manager can start with a seemingly suboptimal or inefficient ex ante portfolio in traditional mean variance space and earn higher ex post net returns after accounting for transaction costs. Sommer and Pasquali discuss the lack of a universally agreed upon and adopted measure or model that adequately captures cost and time to liquidation in bond (OTC) markets. After a review of 40 years of research, they propose a more adequate measure and further suggest that machine learning methods are a natural candidate to overcome the main obstacles. Next, Polidore, Jiang, and Li study methods of altering the standard approach to volume weighted average price such that it respects stock-specific volume volatility. They also argue that traders should not choose algorithms based on stock characteristics; instead, algorithm choice should focus on the tradeoff between cost and timing risk. Ceccon, Thukral, and Eleuterio evaluate momentum strategies. They look at four popular languages used by quantitative researchers and traders to program their models from a performance point of view while considering how easy it is to obtain programs that run in an acceptable amount of time. In our special section on market structure and trading related activities, Virgilio presents the results of an agent-based model simulation under two different cases: a quiet situation and a market following a trend. Results suggests that the interaction between high-frequency and low-frequency traders, rather than the mere participation of high-frequency traders, may be the main cause of higher-than-normal volatility. Lewis and McPartland describe the CHX SNAP, the proposed intraday, on-demand auction service of the Chicago Stock Exchange, which represents the first significant attempt to incorporate batch auctions into U.S. equity markets. If commercially successful, the CHX SNAP auction would allow institutional traders to leave hidden resting equity orders at the CHX out of the vision of digital traders that might otherwise attempt to profit from such knowledge. We conclude the issue with Kumiega, Sterijevski, and Van Vliet, who present an overview of the complexity of the automated market network and describe how market participants interact through the exchange mechanism. They define new terms and a new framework for understanding the risk of extreme market moves from a reliability and safety perspective. As always, we welcome your submissions. We value your comments and suggestions, so please email us at journals@investmentresearch.org.