Implementation Shortfall
Implementation shortfall is the gap between a decision price (or arrival price) and the actual average execution price, including missed-trade opportunity cost.
Definition
Perold’s implementation shortfall is paper P&L minus live P&L: delay, market impact, timing, and unfilled residual versus the decision price. Arrival-price slippage is the common desk proxy.
Why it matters
A backtest that ignores shortfall is not a strategy — it is a shopping list. Shortfall is the tax that turns paper Sharpe into live Sharpe.
Case
A mid-cap rebalance that “bought the close” on paper but worked a 20% POV order over two days pays impact and residual risk the simulator never saw.
How to read it
Split delay, impact, timing, and opportunity cost. If you only report average fill vs mid, you are missing the unfilled tail — usually the expensive part.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- The Implementation Shortfall: Paper versus RealityPerold · 1988 · Journal of Portfolio ManagementThe original shortfall definition.