FIN 010 Lecture Notes - Lecture 31: Santa Barbara City College, Survivorship Bias, Idiosyncrasy
Document Summary
Proxies: eg. bid-ask spreads, time between transactions, price impact of a large trade, volume/value of shares traded, depth in a limit order book. Transaction costs (commissions, taxes, costs of due diligence, etc. ) Price impact (large traders consume liquidity/being informed"") 3 main biases (return overstated, risk understated) reported returns are not true". By setting a passive allocation to illiquid asset classes, like real estate; By choosing securities within an asset class that are more illiquid, that is. By acting as a market maker at the individual security level; and. By engaging in dynamic strategies at the aggregate portfolio level by engaging in liquidity security selection; Difficult to determine if liquid asset classes deliver excess returns (unclear relo b/w returns & illiquidity) Investing: should have long holding periods, rise to agency problems (difficult to monitor external managers), high idiosyncratic risk (no market" portfolio) -> need to identify skilled manager. Asset p when expected transaction costs are taken into account (exp.
