Another look at trading costs and short-term reversal profits

Wilma de Groot, Joop Huij and Weili Zhou

Journal of Banking & Finance, 2012, vol. 36, issue 2, 371-382

Abstract: Several studies report that abnormal returns associated with short-term reversal investment strategies diminish once trading costs are taken into account. We show that the impact of trading costs on the strategies’ profitability can largely be attributed to excessively trading in small cap stocks. Limiting the stock universe to large cap stocks significantly reduces trading costs. Applying a more sophisticated portfolio construction algorithm to lower turnover reduces trading costs even further. Our finding that reversal strategies generate 30–50 basis points per week net of trading costs poses a serious challenge to standard rational asset pricing models. Our findings also have important implications for the understanding and practical implementation of reversal strategies.

Keywords: Market efficiency; Anomalies; Short-term reversal; Portfolio construction; Market impact; Transaction costs; Liquidity (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:2:p:371-382

DOI: 10.1016/j.jbankfin.2011.07.015

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