Working Paper: NBER ID: w20721
Authors: Robert Novy-Marx; Mihail Velikov
Abstract: This paper studies the performance of a large number of anomalies after accounting for transaction costs, and the effectiveness of several transaction cost mitigation strategies. It finds that introducing a buy/hold spread, which allows investors to continue to hold stocks that they would not actively trade into, is the single most effective simple cost mitigation strategy. Most of the anomalies that we consider with one-sided monthly turnover lower than 50% continue to generate statistically significant net spreads, at least when designed to mitigate transaction costs. Few of the strategies with higher turnover do. In all cases transaction costs reduce the strategies’ profitability and its associated statistical significance, increasing concerns related to data snooping.
Keywords: No keywords provided
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| buy-hold spread (G19) | profitability (L21) |
| transaction costs (D23) | perceived profitability of anomalies (G14) |
| transaction costs (D23) | profitability of trading anomalies (G14) |
| firm characteristics (L20) | transaction costs (D23) |
| transaction costs (D23) | statistical significance of net excess returns (C46) |