Cost-mitigation of factor investing in emerging equity markets

Kay Stankov, Dirk Schiereck and Volker Flögel

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: At the beginning of factor investing research, the investment universe concentrated on developed markets and transaction costs were paid little attention. Expensive trading costs of factor investing in emerging equity markets influence optimal portfolio decisions. Based on a total costs estimate of factor-based portfolio tilts, a simple cost-mitigation approach increases net performance. Exploiting the structure of market impact, we indirectly control the costs by limiting order sizes relative to their underlying stocks’ short-term liquidity. This cost-efficient strategy yields better implementability and lower-priced turnover while a possible negative effect on gross performance is more than offset.

Date: 2024
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Published in Journal of Asset Management 3 (2024) : pp. 303-325

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Persistent link: https://EconPapers.repec.org/RePEc:dar:wpaper:150250

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