Trading Costs of Asset Pricing Anomalies

68 Pages Posted: 19 Feb 2014 Last revised: 28 Mar 2014

Andrea Frazzini

AQR Capital Management, LLC

Ronen Israel

AQR Capital Management, LLC

Tobias J. Moskowitz

AQR Capital; University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: December 5, 2012

Abstract

Using nearly a trillion dollars of live trading data from a large institutional money manager across 19 developed equity markets over the period 1998 to 2011, we measure the real-world transactions costs and price impact function facing an arbitrageur and apply them to size, value, momentum, and short-term reversal strategies. We find that actual trading costs are less than a tenth as large as, and therefore the potential scale of these strategies is more than an order of magnitude larger than, previous studies suggest. Furthermore, strategies designed to reduce transactions costs can increase net returns and capacity substantially, without incurring significant style drift. Results vary across styles, with value and momentum being more scalable than size, and short-term reversals being the most constrained by trading costs. We conclude that the main anomalies to standard asset pricing models are robust, implementable, and sizeable.

Suggested Citation

Frazzini, Andrea and Israel, Ronen and Moskowitz, Tobias J., Trading Costs of Asset Pricing Anomalies (December 5, 2012). Fama-Miller Working Paper; Chicago Booth Research Paper No. 14-05. Available at SSRN: https://ssrn.com/abstract=2294498

Andrea Frazzini

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203-742-3894 (Phone)
203-742-3394 (Fax)

HOME PAGE: http://www.econ.yale.edu/~af227/

Ronen Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Tobias J. Moskowitz (Contact Author)

AQR Capital ( email )

Greenwich, CT
United States

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-2757 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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