A Transaction-Cost Perspective on the Multitude of Firm Characteristics

Document Type

Article

Publication Date

5-1-2020

Abstract

We investigate how transaction costs change the number of characteristics that are jointly significant for an investor's optimal portfolio and, hence, how they change the dimension of the cross-section of stock returns. We find that transaction costs increase the number of significant characteristics from 6 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. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Identifier

85086568133 (Scopus)

Publication Title

Review of Financial Studies

External Full Text Location

https://doi.org/10.1093/rfs/hhz085

e-ISSN

14657368

ISSN

08939454

First Page

2180

Last Page

2222

Issue

5

Volume

33

Grant

MTM2013-44902-P

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