Working Paper Series

A Transaction-Cost Perspective on the Multitude of Firm Characteristics

We investigate how transaction costs change the number of firm-specific charac-teristics that are jointly significant for explaining the cross section of stock returns. We find that transaction cos ...

Author(s) :

Victor DeMiguel

Alberto Martín-Utrera

Francisco J. Nogales

Abstract :

We investigate how transaction costs change the number of firm-specific charac-teristics that are jointly significant for explaining 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 under-lying stocks required to rebalance di erent 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.

Link SSRN

Date : 21/08/2018
Working Paper Number: WP-18-005

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