http://dx.doi.org/10.1016/j.jbankfin.2011.07.015
scopus: 81955162895
Another look at trading costs and short-term reversal profits
February 2012
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Several studies report that abnormal returns associated with short-term reversal investment strategies diminish once trading costs are taken into account. We show that the impact of trading costs on the strategies' profitability can largely be attributed to excessively trading in small cap stocks. Limiting the stock universe to large cap stocks significantly reduces trading costs. Applying a more sophisticated portfolio construction algorithm to lower turnover reduces trading costs even further. Our finding that reversal strategies generate 30-50 basis points per week net of trading costs poses a serious challenge to standard rational asset pricing models. Our findings also have important implications for the understanding and practical implementation of reversal strategies.
- Transaction costs
- Anomalies
- Liquidity
- Market efficiency
- Market impact
- Portfolio construction
- Short-term reversal
- G11 : Portfolio Choice; Investment Decisions
- G12 : Asset Pricing
- G14 : Information and Market Efficiency; Event Studies
- stock
- reversal
- return
- trading
- trading costs
- strategy
- estimate
- reversal profits
- portfolio
- reversal strategy
- market
- nomura
- panel
- profit
- model
- trading cost estimates
- table
- cap stocks
- point
- reversal strategies
