I know that implementation shortfall for sales involves reversing the calculation in the numerator by taking: gain in real portfolio - gain in paper portfolio. My question is, does this mean that all the component formulas (i.e. delay costs, realized gains/losses) are also reversed? For instance, to calculate the delay costs for sales, is the numerator of the formula: benchmark price - previous day’s closing price?
I don’t know what you are asking, but calculating the implementation shortfall is the same as computing the components (commissions, p/l, delay, opportunity costs) and adding them together.
Ok sorry, maybe i was not clear. Lets say given this following example: The benchmark price is $10 for ABC shares on Monday. I decide to sell 1,000 ABC shares on Tuesday. None of my orders are filled on Tuesday and the price closes at $10.05. 500 ABC shares are sold on Wednesday and I cancel the rest of my orders. ABC shares closes at $10.10 on Wednesday. Is my delay costs [(10.05-10.00)/10.00]*(500/1,000) = 0.25% or [(10-10.05)/10.00]*(500/1,000) = -0.25%?
Delay for Tuesday is 0 and Delay for Wednesday is the first equation.
you sure BP? i would say 2nd equation- delaying here with a sale and the px is rising HELPS you not hurts you.
put a - (negative) sign on all of your purchase formula… commissions = actualCommissions / (origBM*Total) realized gain/loss = -1 * Filled / Total * (Filled - Rev BM)/Orig BM delay = - Filled / Total * (Rev BM - Orig BM)/Orig BM Missed Opp. = -1 * (Close/Cancel - Orig BM)/Orig BM * Unfilled / Total
i thought it was the 2nd equation too…the 1st equation would be right if its a purchase right?
ok so its the 2nd equation then…thanks cpk
What about commissions, there should be a negative sign too…
whether you buy or sell, you are paying the same commissions aren’t you? They are a part of your return. You do not forego commissions because you decide to sell. They are still added on to your trade, right?
no there shouldn’t. commissions always subtract from your return- so it’s always going to be a positive # in the shortfall calculation. buy or sell, same formula.
thanks bannis…
how you feeling CP? i think it’s a one and done for you. 
this is our year.
nope… I do not feel that way at all… many of the things I am struggling with, and I do not know how to put into words what so many folks out here are doing so eloquently. Not belonging to the industry either does me no favors. I am giving this really in a week’s time as a practice test…