A Taxonomy of Anomalies and Their Trading Costs

61 Pages Posted: 8 Dec 2014

See all articles by Robert Novy-Marx

Robert Novy-Marx

Simon Business School, University of Rochester; National Bureau of Economic Research (NBER)

Mihail Velikov

Federal Reserve Bank of Richmond

Date Written: December 2014

Abstract

This paper studies the performance of a large number of anomalies after accounting for transaction costs, and the effectiveness of several transaction cost mitigation strategies. It finds that introducing a buy/hold spread, which allows investors to continue to hold stocks that they would not actively trade into, is the single most effective simple cost mitigation strategy. Most of the anomalies that we consider with one-sided monthly turnover lower than 50% continue to generate statistically significant net spreads, at least when designed to mitigate transaction costs. Few of the strategies with higher turnover do. In all cases transaction costs reduce the strategies’ profitability and its associated statistical significance, increasing concerns related to data snooping.

Suggested Citation

Novy-Marx, Robert and Velikov, Mihail, A Taxonomy of Anomalies and Their Trading Costs (December 2014). NBER Working Paper No. w20721. Available at SSRN: https://ssrn.com/abstract=2535173

Robert Novy-Marx (Contact Author)

Simon Business School, University of Rochester ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mihail Velikov

Federal Reserve Bank of Richmond ( email )

502 S. Sharp Street
Baltimore, MD 21201
United States

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