A Taxonomy of Anomalies and their Trading Costs
This paper studies the performance of a large number of anomalies after accounting for transaction costs, and the effectiveness of several transaction cost mitigation strategies. It finds that introducing a buy/hold spread, which allows investors to continue to hold stocks that they would not actively trade into, is the single most effective simple cost mitigation strategy. Most of the anomalies that we consider with one-sided monthly turnover lower than 50% continue to generate statistically significant net spreads, at least when designed to mitigate transaction costs. Few of the strategies with higher turnover do. In all cases transaction costs reduce the strategies’ profitability and its associated statistical significance, increasing concerns related to data snooping.
Professor Novy-Marx currently consults with Dimensional Fund Advisors, an investment firm headquartered in Austin, Texas. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.