Implementation Shortfall in Transaction Cost Analysis: A Further Extension

Implementation shortfall, originally proposed by Perold and later expanded by Wagner and Edwards and Kissell, can adversely affect portfolio performance if it is not properly managed through implementation strategy as a result of price impact, timing cost, and inability to complete total transactions. The authors further classify implementation shortfall to give traders a better understanding of opportunity cost and a method to control any or all of these costs while executing trades. They suggest that after thorough back testing, market price trend analysis, and pretrade analysis, setting price limits efficiently will ensure that the first trading–related and residual trading–related opportunity cost will be as low as possible for the trader, thus lowering overall implementation shortfall.