Comparing Cost-Mitigation Techniques
39 Pages Posted: 21 Oct 2018 Last revised: 22 Dec 2019
Date Written: September 27, 2018
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: Suggested Citation