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A Transaction-Cost Perspective on the Multitude of Firm Characteristics

Author

Listed:
  • Victor DeMiguel
  • Alberto Martín-Utrera
  • Francisco J Nogales
  • Raman Uppal

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 6 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.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Victor DeMiguel & Alberto Martín-Utrera & Francisco J Nogales & Raman Uppal, 2020. "A Transaction-Cost Perspective on the Multitude of Firm Characteristics," The Review of Financial Studies, Society for Financial Studies, vol. 33(5), pages 2180-2222.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:5:p:2180-2222.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz085
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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