Another Look at Trading Costs and Short-Term Reversal Profits

44 Pages Posted: 15 May 2010 Last revised: 26 Jul 2011

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

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

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

JEL Classification: G11, G12, G14

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: https://ssrn.com/abstract=1605049 or http://dx.doi.org/10.2139/ssrn.1605049

Wilma De Groot

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands
+31 10 224 3107 (Phone)

Joop Huij (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

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

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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