Implementation Shortfall

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pollfre

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Hi guys,
I am totally confused with the implementation shortfall cost. Which benchmark price should be taken? The prior day closing price, the price at which time the decision was taken, the mid price, the initial limit price?
There are so many possibilities that I never know which one to take…
Thanks!
 
1) Explicit Costs
2) Realized Costs = [(EP - BP*)/DP] * (Filled/Total)
3) Unrealized Costs/Missed = [(CP-DP)/DP] * (Missed/Total)
4) Delay Costs = [(BP*-DP)/DP] * (Filled/Total)
Key:
DP = Decision Price, I am setting my limit order for $11.95 even though it’s trading at $12.00
BP* = Adjusted Decision Price, where you decide to buy at $11.95 but NO, WAIT, the limit order missed its fill! Now you need to buy the next day and it’s trading at $12.05
EP = Execution Price - it’s the next day and since you want to buy at BP* you’ll set the limit order at $12.08, where it fills
CP = Cancellation Price, when it ends the day at $12.10 and you never filled the remainder or your order
The ones in BOLD are the inputs
 
This seems to be the best summary of IS components I’ve seen. Do we agree this is accurate? Looks good to me.
 
I’d buy Willa Cather a beer wrote:
Isnt there realized profit?
(CP-BP*)/DP (filled/total)?
Click to expand...
Yes. I think:
“Realized Profit/Loss” is #2 in that list, and the formula looks correct.
EDIT: Just saw your response, yeah its confusing. And there aren’t a lot of examples. Just trying to get this down for potentially easy points.
 
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