An Empirical Investigation of Methods to Reduce Transaction Costs
42 Pages Posted: 16 Sep 2014 Last revised: 11 Dec 2014
Date Written: August 5, 2014
Among 37 methods to reduce transaction costs, we recursively choose the best method for next period’s investment in each of three portfolio strategies: levered-momentum, zero-cost momentum, and the equally-weighted market. We identify a few of the best methods and offer a framework by which additional methods can be considered. Within our framework, the best methods recapture a substantial amount of wealth and significantly improve risk-adjusted performance, both economically and statistically. Security migration can present a barrier to transaction cost reduction, as improvements occur for zero-cost momentum portfolios invested in all stocks but not for decile-momentum portfolios.
Keywords: transaction costs, distance measures, portfolio optimization, momentum, equal weight portfolios
JEL Classification: G11, G12
Suggested Citation: Suggested Citation