A paper information coefficient does not survive contact with the names the book
must trade. Short-horizon forecasts are refreshed often, and the refresh is
turnover. Turnover is the bridge from the sort to cost, and cost is higher where
the book is small and illiquid. The turnover algebra and the capacity and market-impact notes already carry the
formulas. This note attaches the reported book-to-price and cash-flow numbers to
those formulas and states what the researcher is allowed to conclude about
capacity.
Learning objectives. By the end of this note you should be able to:
- tie information horizon to rebalance frequency, and rebalance frequency to turnover;
- read cross-sectional score autocorrelation and quarterly turnover at a fixed tracking error as a pair;
- separate passive drift from forecast-driven turnover;
- refuse a capacity figure in assets under management that the extracts do not report, and still rank which leg of the book pays more to trade.
In this lesson
- Horizon, refresh, turnover
- What moves the weights when the forecast does not
- Capacity without an invented asset figure
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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