What You See Is Not What You Get: The Costs of Trading Market Anomalies
63 Pages Posted: 12 Sep 2017 Last revised: 28 Nov 2018
Date Written: November 28, 2018
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 a general technique to measure the real-world implementation costs of financial market anomalies. Our method extends Fama-MacBeth regressions to compare the on-paper returns to factor exposures with those achieved by mutual funds. Unlike existing approaches, our approach delivers estimates of all-in implementation costs without relying on parametric microstructure models or explicitly specified 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: Suggested Citation