Structural Expected Negative Return refers to a predictable, inherent average loss embedded within certain financial instruments or trading strategies, arising from their fundamental design or market mechanics. This is not a speculative outcome but a systematic drag on performance over time, often due to factors like bid-ask spreads, transaction costs, or the decay of time value in options. In crypto markets, specific liquidity pools or derivative structures can exhibit this characteristic.
Mechanism
The mechanism generating structural expected negative return typically involves the continuous cost of maintaining a position or strategy. For instance, in options, time decay (theta) means a long option position will lose value daily, all else being equal. Similarly, constantly paying the bid-ask spread on frequent trades, especially in less liquid crypto assets, accumulates into a consistent negative return. These costs are operational components that systematically reduce net gains or compound losses.
Methodology
Identifying and mitigating structural expected negative return requires a methodology of precise cost analysis and strategic instrument selection. Investors and traders must accurately quantify these implicit costs, understanding how they compound over time. Strategies involve optimizing trade execution to minimize slippage, selecting instruments with more favorable structural characteristics, or employing longer-term approaches that reduce the frequency of cost-incurring transactions, thereby seeking to minimize this inherent performance decrement.
Regulators quantified the negative return of binary options by modeling their asymmetric payout structure, which mathematically guarantees client losses over time.
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