In this research paper, titled “Trading Costs of Asset Pricing Anomalies,” authored by Andrea Frazzini, Ronen Israel, and Tobias J. Moskowitz, the focus is on investigating the trading costs associated with size, value, momentum, and short-term reversal strategies—commonly recognized asset pricing anomalies.
The study leverages an extensive dataset, comprising nearly a trillion dollars of live trading data from a major institutional money manager across 19 developed equity markets during the period 1998 to 2011. By examining the real-world transactions costs and price impact functions faced by arbitrageurs, the research delves into the practical implications for these well-known anomalies.
The findings challenge previous notions, revealing that the actual trading costs are markedly smaller than previously estimated, making the potential scale of these strategies over ten times larger than earlier studies suggested.
Additionally, the paper explores strategies aimed at minimizing transactions costs, demonstrating their capacity to significantly enhance net returns without introducing substantial style drift.
The research underscores variations across different anomaly types, highlighting that value and momentum strategies exhibit greater scalability compared to size, while short-term reversals face more pronounced constraints due to trading costs.
Ultimately, the conclusion drawn is that the identified anomalies in standard asset pricing models are not only robust and implementable but also possess considerable sizeability in real-world applications.
Abstract Of Paper
Using nearly a trillion dollars of live trading data from a large institutional money manager across 19 developed equity markets over the period 1998 to 2011, we measure the real-world transactions costs and price impact function facing an arbitrageur and apply them to size, value, momentum, and short-term reversal strategies. We find that actual trading costs are less than a tenth as large as, and therefore the potential scale of these strategies is more than an order of magnitude larger than, previous studies suggest.
Furthermore, strategies designed to reduce transactions costs can increase net returns and capacity substantially, without incurring significant style drift. Results vary across styles, with value and momentum being more scalable than size, and short-term reversals being the most constrained by trading costs. We conclude that the main anomalies to standard asset pricing models are robust, implementable, and sizeable.
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Author
Andrea Frazzini
AQR Capital Management, LLC
Ronen Israel
AQR Capital Management, LLC
Tobias J. Moskowitz
Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)
Conclusion
In this comprehensive examination led by Andrea Frazzini, Ronen Israel, and Tobias J. Moskowitz, the study delves into the trading costs associated with asset pricing anomalies. Leveraging a vast dataset of nearly a trillion dollars in live trading data from a major institutional money manager across 19 developed equity markets from 1998 to 2011, the research assesses the real-world transactions costs and price impact function for size, value, momentum, and short-term reversal strategies.
The key finding reveals that actual trading costs are significantly smaller than previously estimated, expanding the potential scale of these strategies more than tenfold.
Moreover, strategies aimed at minimizing transactions costs can substantially boost net returns and capacity without introducing significant style drift. Notably, variations across styles are observed, with value and momentum strategies proving more scalable than size-based approaches, while short-term reversals are the most constrained by trading costs.
In summary, this study underscores the robustness and implementability of anomalies in relation to standard asset pricing models. The insights gained emphasize the importance of considering and mitigating trading costs when formulating and executing asset pricing anomaly strategies, offering valuable implications for both practitioners and researchers.
FAQ
– What is the main focus of the research paper “Trading Costs of Asset Pricing Anomalies” by Andrea Frazzini, Ronen Israel, and Tobias J. Moskowitz?
The research paper aims to investigate the real-world trading costs and price impact associated with various asset pricing anomalies, including size, value, momentum, and short-term reversal strategies. It uses a substantial dataset of live trading data to assess the practical implications of these anomalies.
– What are the key findings of the study regarding the trading costs of asset pricing anomalies?
The study challenges prior assumptions, revealing that the actual trading costs for these strategies are considerably smaller than previously estimated, amounting to less than one-tenth of earlier assessments.
This suggests a significantly larger potential scale for implementing these strategies and highlights the importance of strategies to mitigate transaction costs.
– How do the research findings impact investment opportunities and the scalability of different asset pricing styles?
The research suggests that the anomalies to standard asset pricing models, including size, value, momentum, and short-term reversals, remain robust and implementable in practice, offering substantial investment opportunities.
However, the scalability varies across different asset pricing styles, with value and momentum strategies being more adaptable compared to size, and short-term reversals being the most constrained by trading costs.
