68 Pages Posted: 19 Feb 2014 Last revised: 28 Mar 2014
Date Written: December 5, 2012
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: 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