Comparing Cost-Mitigation Techniques

39 Pages Posted: 21 Oct 2018

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: September 27, 2018

Abstract

This paper compares the efficacy of three common transaction cost mitigation techniques: limiting a strategy to cheap-to-trade securities, rebalancing a strategy less frequently, and “banding,” which imposes a higher hurdle for actively trading into a position than for maintaining an established position. All three strategies significantly reduce transaction costs, but the techniques that reduce turnover have less negative impact on strategy gross performance than limiting trade to low cost securities. Banding is more effective than simply reducing rebalancing frequencies, because banding yields similar trading cost reductions while maintaining a better exposure to the underlying signal used to select stocks.

Keywords: Investments, Trading Costs, Performance Evaluation, Market Efficiency

JEL Classification: G12

Suggested Citation

Novy-Marx, Robert and Velikov, Mihail, Comparing Cost-Mitigation Techniques (September 27, 2018). Financial Analysts Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3253359

Robert Novy-Marx

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 (Contact Author)

Federal Reserve Bank of Richmond ( email )

502 S. Sharp Street
Baltimore, MD 21201
United States

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