Market Model Thingy

[CallMeIshmael]

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trading at the same price (the close) you use to make a decision is a good way to make your system unrealistic. start by modifying your program to include a one-day lag for trading and a linear transaction cost for bid/ask; if your system is still profitable after those changes, then this becomes a much more interesting discussion.

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OK. Any suggestions as to how much of a linear cost?


Also, what exactly do you mean by a 1-day lag? Is using the next days opening price a more realistic sell price?

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25 bps? 50 bps? can someone who knows anything step in with an average bid/ask spread for equities, instead of me almost randomly guessing?

there needs to be some sort of lag between calculating your positions and trading on them. calculating based on the close on day t and trading at the open of day t+1 would be a .5 day lag, which is better than nothing. a one day lag would mean trading at the closing price on day t+1, and would probably be more realistic for someone trading daily. best would probably be to average the open and close of day t+1, implicitly assuming that you used the entire day's liquidity to make your trade.

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I added to the model a discount on all sales by a factor of 0.995, and used the next days closing price as the sell price (I didnt have immediate access to the open price, and it would require a bit of leg work, so I just went next days close for now).

The results were still good, though obviously lower given the 0.995 discount.



Oddly, it appears that using the next days close price actually benefits the model.