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A transaction-cost perspective on the multitude of firm characteristics

Journal

Review of Financial Studies

Subject

Management Science and Operations

Publishing details

Review of Financial Studies 2020 Vol 33:5 p 2180-2222

Authors / Editors

DeMiguel V;Martin-Utrera A;Nogales F J;Uppal R

Biographies

Victor DeMiguel

Publication Year

2020

Abstract

We investigate how transaction costs change the number of characteristics that are jointly significant for an investor’s optimal portfolio, and hence, how they change the dimension of the cross section of stock returns. We find that transaction costs increase the number of significant characteristics from six to 15. The explanation is that, as we show theoretically and empirically, combining characteristics reduces transaction costs because the trades in the underlying stocks required to rebalance different characteristics often cancel out. Thus, transaction costs provide an economic rationale for considering a larger number of characteristics than that in prominent asset-pricing models.

Keywords

Cross section of stock returns; Trading diversification; Factor zoo

Available on ECCH

No


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