A Transaction-Cost Perspective on the Multitude of Firm Characteristics

Martin Utrera, Alberto and DeMiguel, Victor and Uppal, Raman and Nogales, Francisco J. (2017) A Transaction-Cost Perspective on the Multitude of Firm Characteristics. Working Paper. UNSPECIFIED.

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We investigate how transaction costs change the number of firm-specific characteristics that are jointly significant for explaining the cross section of stock returns. We find that transaction costs increase the number of significant characteristics from six to 15. The explanation is that, as we show theoretically and empirically, combining characteristics reduces transaction costs because the trades in the underlying stocks required to rebalance different characteristics often cancel out. Thus, transaction costs provide an economic rationale for considering a larger number of characteristics than that in prominent asset-pricing models.

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27 Sep 2018 12:58
Last Modified:
12 Sep 2023 04:24