A Transaction-Cost Perspective on the Multitude of Firm Characteristics

114 Pages Posted: 8 Feb 2017 Last revised: 17 Jan 2019

See all articles by Victor DeMiguel

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: January 8, 2019

Abstract

We investigate how transaction costs change the number of characteristics that are jointly significant for an investor’s optimal portfolio, and hence, how they change the dimension of the cross section of stock returns. We find that transaction costs increase the number of significant characteristics from six to 15. The explanation is that, as we show theoretically and empirically, combining characteristics reduces transaction costs because the trades in the underlying stocks required to rebalance different characteristics often cancel out. Thus, transaction costs provide an economic rationale for considering a larger number of characteristics than that in prominent asset-pricing models.

Keywords: cross section of stock returns, trading diversification, factor zoo

JEL Classification: G11

Suggested Citation

DeMiguel, Victor and Martin-Utrera, Alberto and Nogales, Francisco J. and Uppal, Raman, A Transaction-Cost Perspective on the Multitude of Firm Characteristics (January 8, 2019). 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

Register to save articles to
your library

Register

Paper statistics

Downloads
1,826
rank
8,203
Abstract Views
6,292
PlumX Metrics