To Trade or Not to Trade? Informed Trading with High-Frequency Signals for Long-Term Investors
When a long-term investor trades a slowly changing portfolio, she is not very time sensitive to when exactly she should place or change her bet. The value of the embedded optionality provided by this flexibility may be extracted by using high frequency information to choose when to trade (exercise the option). Mechanically, if the short-term view concurs with the trade, then the trade is placed. Otherwise, the investor waits for a more favorable environment. Strategic trade modification provides exposure to short-term signals without having to pay additional transaction costs and with no capacity limits. We implement our trading approach (Informed Trading) on real and simulated portfolios to illustrate its effect on portfolio performance. We show that realistic portfolios can achieve a five percent exposure to a high frequency signal. Long-term investors should no longer ignore high frequency information just because it is too expensive to trade on.
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