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
Recommended Citation
Demiguel, Victor; Martín-Utrera, Alberto; Nogales, Francisco J.; and Uppal, Raman, "A Transaction-Cost Perspective on the Multitude of Firm Characteristics" (2020). Faculty Publications. 5328.
https://digitalcommons.njit.edu/fac_pubs/5328
