Abstract

http://ssrn.com/abstract=1605049
 
 

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Another Look at Trading Costs and Short-Term Reversal Profits


Wilma De Groot


Robeco Asset Management

Joop Huij


Erasmus University - Rotterdam School of Management; Robeco Quantitative Strategies; Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

Weili Zhou


Robeco Asset Management

July 1, 2011


Abstract:     
Several studies report that abnormal returns associated with short-term reversal investment strategies diminish once transaction costs are taken into account. We show that the impact of transaction costs on the strategies’ profitability can largely be attributed to excessively trading in small cap stocks. Limiting the stock universe to large cap stocks significantly reduces trading costs. Applying a more sophisticated portfolio construction algorithm to lower turnover reduces trading costs even further. Our finding that reversal strategies generate 30 to 50 basis points per week net of transaction costs poses a serious challenge to standard rational asset pricing models. Our findings also have important implications for the understanding and practical implementation of reversal strategies.

Number of Pages in PDF File: 44

Keywords: market efficieny, anomalies, short-term reversal, portfolio construction, market impact, transaction costs, liquidity

JEL Classification: G11, G12, G14

working papers series


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Date posted: May 15, 2010 ; Last revised: July 26, 2011

Suggested Citation

de Groot, Wilma and Huij, Joop and Zhou, Weili, Another Look at Trading Costs and Short-Term Reversal Profits (July 1, 2011). Available at SSRN: http://ssrn.com/abstract=1605049 or http://dx.doi.org/10.2139/ssrn.1605049

Contact Information

Wilma De Groot
Robeco Asset Management ( email )
Rotterdam, 3011 AG
Netherlands
+31 10 224 3107 (Phone)
Joop Huij (Contact Author)
Erasmus University - Rotterdam School of Management ( email )
P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
HOME PAGE: http://www.rsm.nl/jhuij
Robeco Quantitative Strategies
Rotterdam, 3011 AG
Netherlands
HOME PAGE: http://www.robeco.com/quant
Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)
P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
Weili Zhou
Robeco Asset Management ( email )
Rotterdam, 3011 AG
Netherlands
+31-10-2242222 (Phone)
HOME PAGE: http://www.robeco.com/quant
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