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Stock Market Liquidity and the Trading Costs of Asset Pricing Anomalies

Author

Listed:
  • Marie Brière

    (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Charles-Albert Lehalle

    (Department of Mathematics [Imperial College London] - Imperial College London)

  • Tamara Nefedova

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Amine Raboun

    (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

Using a large database of the US institutional investors' trades, this paper revisits the question of anomalies-basedportfolio transaction costs. The real costs paid by large investors to implement the well-identified size, value, andmomentum anomalies are lower than what has been documented in the previous studies. We find that the averageinvestor pays an annual transaction cost of 17bps for size, 24bps for value, and 274bps for momentum. The threestrategies generate statistically significant returns of respectively 5.21%, 2.79% and 2.77% after accounting fortransaction costs. When the market impact is taken into account, transaction costs reduce substantially the profitabilityof the well-known anomalies for large portfolios, however, these anomalies remain profitable for average size portfolios.The break-even capacities in terms of fund size are $ 206 billion for size, $ 16.1 billion for value and $ 310 million formomentum.

Suggested Citation

  • Marie Brière & Charles-Albert Lehalle & Tamara Nefedova & Amine Raboun, 2020. "Stock Market Liquidity and the Trading Costs of Asset Pricing Anomalies," Post-Print hal-04283720, HAL.
    • Handle: RePEc:hal:journl:hal-04283720
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    Cited by:

    1. Marie Brière & Ariane Szafarz, 2021. "When it rains, it pours: Multifactor asset management in good and bad times," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 641-669, September.
    2. Andrew Y. Chen & Mihail Velikov, 2020. "Zeroing in on the Expected Returns of Anomalies," Finance and Economics Discussion Series 2020-039, Board of Governors of the Federal Reserve System (U.S.).

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