Transaction Costs, Trading Volume and Momentum Strategies

Posted: 21 May 2019

See all articles by Xiafei Li

Xiafei Li

Nottingham University Business School

Chris Brooks

University of Reading - ICMA Centre

Joëlle Miffre

Audencia Nantes School of Management; Audencia Business School

Date Written: May 18, 2009

Abstract

This study considers the relationship between trading volumes, transactions costs, and the profitability of momentum strategies using data from the UK. We demonstrate that round-trip transactions costs for selling loser firms are around double those of buying winners, and in particular, the costs of selling low volume losers is more than twice as high as the cost of selling low volume winners. By contrast, there are only modest differences between the costs of buying winners and losers, irrespective of their volume levels. Yet we observe that, even in net terms, momentum strategies based on low volume stocks are more profitable than those using high volume stocks. We also note important differences between transactions costs measured using quoted versus effective spreads. Altogether, our findings should sound a word of caution for any study attempting to evaluate the impact of transactions costs on momentum profitability that such costs are very heterogeneous across firms and trade types, implying that they require careful calculation.

Keywords: Momentum profits, Transaction costs, bid-ask spreads, trading volume

JEL Classification: G12, G19

Suggested Citation

Li, Xiafei and Brooks, Chris and Miffre, Joelle, Transaction Costs, Trading Volume and Momentum Strategies (May 18, 2009). https://doi.org/10.3905/JOT.2010.5.1.066. Available at SSRN: https://ssrn.com/abstract=1406475 or http://dx.doi.org/10.2139/ssrn.1406475

Xiafei Li

Nottingham University Business School ( email )

Jubilee Campus
Nottingham, NG8 1BB
United Kingdom
+44 (0)115 9518603 (Phone)

Chris Brooks (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

Joelle Miffre

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

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