A Portfolio Perspective on the Multitude of Firm Characteristics

85 Pages Posted: 8 Feb 2017 Last revised: 10 Mar 2018

Victor DeMiguel

London Business School

Alberto Martin-Utrera

Lancaster University Management School

Francisco J. Nogales

Universidad Carlos III de Madrid - Department of Statistics; Institute of Financial Big Data UC3M-BS

Raman Uppal

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 8, 2018

Abstract

We investigate how many characteristics matter jointly for an investor who cares not only about average returns but also about portfolio risk and transaction costs. Our main finding is that transaction costs significantly increase the dimension of the cross section of stock returns. While in the absence of transaction costs only a small number of characteristics--about six--are significant, in the presence of transaction costs this number _increases_ to 15. The explanation is that, as we show analytically and empirically, combining characteristics helps to substantially reduce transaction costs because the trades in the underlying stocks required to rebalance different characteristics net out. Our work demonstrates that transaction costs provide an economic rationale to consider a larger number of characteristics than that considered in prominent asset-pricing models.

Keywords: transaction costs, cross section of stock returns, trading diversification

JEL Classification: G11

Suggested Citation

DeMiguel, Victor and Martin-Utrera, Alberto and Nogales, Francisco J. and Uppal , Raman, A Portfolio Perspective on the Multitude of Firm Characteristics (March 8, 2018). Available at SSRN: https://ssrn.com/abstract=2912819 or http://dx.doi.org/10.2139/ssrn.2912819

Victor DeMiguel

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Alberto Martin-Utrera (Contact Author)

Lancaster University Management School ( email )

Lancaster LA1 4YX
United Kingdom

Francisco J. Nogales

Universidad Carlos III de Madrid - Department of Statistics ( email )

Avda. de la Universidad, 30
Leganes, Madrid 28911
Spain
+34 916248773 (Phone)

HOME PAGE: http://www.est.uc3m.es/Nogales

Institute of Financial Big Data UC3M-BS ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Raman Uppal

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

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