An Empirical Investigation of Methods to Reduce Transaction Costs

42 Pages Posted: 16 Sep 2014 Last revised: 11 Dec 2014

Date Written: August 5, 2014

Abstract

Among 37 methods to reduce transaction costs, we recursively choose the best method for next period’s investment in each of three portfolio strategies: levered-momentum, zero-cost momentum, and the equally-weighted market. We identify a few of the best methods and offer a framework by which additional methods can be considered. Within our framework, the best methods recapture a substantial amount of wealth and significantly improve risk-adjusted performance, both economically and statistically. Security migration can present a barrier to transaction cost reduction, as improvements occur for zero-cost momentum portfolios invested in all stocks but not for decile-momentum portfolios.

Keywords: transaction costs, distance measures, portfolio optimization, momentum, equal weight portfolios

JEL Classification: G11, G12

Suggested Citation

Moorman, Theodore C., An Empirical Investigation of Methods to Reduce Transaction Costs (August 5, 2014). Journal of Empirical Finance (JEF), Volume 29, December 2014, Pages 230-246., Available at SSRN: https://ssrn.com/abstract=2496416

Theodore C. Moorman (Contact Author)

affiliation not provided to SSRN

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