Stock Market Liquidity and the Trading Costs of Asset Pricing Anomalies

37 Pages Posted: 28 May 2019 Last revised: 14 Jan 2020

See all articles by Marie Briere

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Charles‐Albert Lehalle

Capital Fund Management

Tamara Nefedova

Université Paris Dauphine - PSL

Amine Raboun

Euronext Paris; Université Paris Dauphine

Date Written: April 24, 2019

Abstract

Using a large database of the US institutional investors' trades, this paper sheds new light on the question of anomalies-based portfolio transaction costs. We find that the real costs paid by large investors to implement the well-identified Fama-French anomalies (size, value, investment, and profitability) and Carhart momentum are significantly lower than documented in the previous studies. We show that the average investor pays an annual transaction cost of 16bps for size, 23bps for value, 31bps for investment and profitability and 222bps for momentum. The five strategies generate statistically significant net returns after accounting for transaction costs of respectively 4.29%, 1.98%, 4.45%, 2.69%, and 2.86%. When the market impact is taken into account, transaction costs reduce substantially the profitability of the well-known anomalies for large portfolios, however, these anomalies remain profitable for average size portfolios. The break-even capacities in terms of fund size are $ 184 billion for size, $ 38 billion for value, $ 17 billion for profitability, $ 14 billion for investment and $ 410 million for momentum.

Keywords: Trading Costs, Market Impact, Liquidity, Anomalies-based Investments

JEL Classification: G11, G14

Suggested Citation

Briere, Marie and Lehalle, Charles‐Albert and Nefedova, Tamara and Raboun, Amine, Stock Market Liquidity and the Trading Costs of Asset Pricing Anomalies (April 24, 2019). Université Paris-Dauphine Research Paper No. 3380239, Available at SSRN: https://ssrn.com/abstract=3380239 or http://dx.doi.org/10.2139/ssrn.3380239

Marie Briere (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Paris Dauphine University ( email )

Université Libre de Bruxelles ( email )

Brussels
Belgium

Charles‐Albert Lehalle

Capital Fund Management

23 rue de l'Université
Paris, 75007
France

Tamara Nefedova

Université Paris Dauphine - PSL ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

HOME PAGE: http://www.tamaranefedova.com

Amine Raboun

Euronext Paris ( email )

14 Place des Reflets
Courbevoie, 92400
France
0170482400 (Phone)

Université Paris Dauphine ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

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