A transaction-cost perspective on the multitude of firm characteristics

DeMiguel, V, Martin-Utrera, A, Nogales, F J and Uppal, R (2019) A transaction-cost perspective on the multitude of firm characteristics. The Review of Financial Studies. ISSN 0893-9454 (In Press)

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.

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Item Type: Article
Subject Areas: Management Science and Operations
Additional Information: This is a pre-copyedited, author-produced version of an article accepted for publication in 'The Review of Financial Studies' following peer review. The version of record DeMiguel, V, Martin-Utrera, A, Nogales, F J and Uppal, R (2019) A transaction-cost perspective on the multitude of firm characteristics. 'The Review of Financial Studies' (In Press) will be available online at: [ awaiting DOI when first published online ]
Funder Name: Ministerio de Economía y Competitividad, Ministerio de Economía y Competitividad
Subjects: F > Financial markets
P > Portfolio investment
Date Deposited: 30 May 2019 11:17
Last Modified: 14 Jul 2019 15:42
URI: http://lbsresearch.london.edu/id/eprint/1124
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