Comparing Cost-Mitigation Techniques

Robert Novy-Marx, Mihail Velikov

Research output: Contribution to journalArticle

Abstract

This article compares the efficacy of three common transaction-cost-mitigation techniques: limiting a strategy to cheap-to-trade securities, rebalancing a strategy less frequently, and “banding,” which imposes a higher hurdle for actively trading into a position than for maintaining an established position. All three strategies significantly reduce transaction costs, but the techniques that reduce turnover have a less negative impact on strategy gross performance than limiting trade to low-cost securities has. Banding is more effective than simply reducing rebalancing frequencies, because banding yields similar trading-cost reductions while maintaining a better exposure to the underlying signal used to select stocks.

Original languageEnglish (US)
Pages (from-to)85-102
Number of pages18
JournalFinancial Analysts Journal
Volume75
Issue number1
DOIs
StatePublished - Feb 1 2019

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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