What You See Is Not What You Get: The Costs of Trading Market Anomalies

61 Pages Posted: 12 Sep 2017 Last revised: 12 Mar 2018

Andrew J. Patton

Duke University - Department of Economics

Brian Weller

Duke University - Department of Economics

Date Written: March 9, 2018

Abstract

Is there a gap between the profitability of a trading strategy “on paper” and that which is achieved in practice? We answer this question by developing two new techniques to measure the real-world implementation costs of financial market anomalies. The first method extends Fama-MacBeth regressions to compare the on-paper returns to factor exposures with those achieved by mutual funds. The second method estimates average return differences between stocks and mutual funds matched on risk characteristics. Unlike existing approaches, these techniques deliver estimates of implementation costs without estimating parametric microstructure models from trading data or explicitly specifying factor trading strategies. After accounting for implementation costs, typical mutual funds earn low returns to value and no returns to momentum.

Keywords: Trading Costs, Performance Evaluation, Mutual Funds, Market Efficiency

JEL Classification: G12, G14, G23

Suggested Citation

Patton, Andrew J. and Weller, Brian, What You See Is Not What You Get: The Costs of Trading Market Anomalies (March 9, 2018). Economic Research Initiatives at Duke (ERID) Working Paper No. 255. Available at SSRN: https://ssrn.com/abstract=3034796 or http://dx.doi.org/10.2139/ssrn.3034796

Andrew J. Patton

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

HOME PAGE: http://econ.duke.edu/~ap172/

Brian Weller (Contact Author)

Duke University - Department of Economics ( email )

Durham, NC
United States

HOME PAGE: http://sites.google.com/site/brianmweller/

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