Implementation Shortfall
Implementation shortfall, a concept introduced by André Perold (1988, “The Implementation Shortfall: Paper versus Reality”), is the difference between the notional value of a trade evaluated at the decision (arrival) price — the price when the trading decision was made — and the value actually realised once market impact, commissions and the cost of price drift during execution are accounted for. It is the precise measure of the gap between a “paper” portfolio and a real one. It appears in this vault as the cost objective that Optimal Execution minimises: the Almgren Chriss 2000 model is built to minimise the expected implementation shortfall (and its variance) of liquidating a fixed position, which is why optimal execution is a cost-reduction problem rather than an alpha-generating one.
Connections
- Optimal Execution — relates, implementation shortfall is the cost objective optimal execution minimises, source: https://www.smallake.kr/wp-content/uploads/2016/03/optliq.pdf
- Almgren Chriss 2000 — defines, the model minimises expected implementation shortfall against the arrival price, source: https://www.smallake.kr/wp-content/uploads/2016/03/optliq.pdf
- Transaction Costs and Slippage — relates, implementation shortfall aggregates impact, fees and slippage into one arrival-price benchmark, source: https://www.smallake.kr/wp-content/uploads/2016/03/optliq.pdf