A transaction-cost perspective on the multitude of firm characteristics
Journal
Review of Financial Studies
Subject
Management Science and Operations
Publishing details
Authors / Editors
DeMiguel V;Martin-Utrera A;Nogales F J;Uppal R
Biographies
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