Cost mitigation of factor investing in emerging equity markets

Kay Stankov (), Dirk Schiereck () and Volker Flögel ()
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Kay Stankov: Head of Data Science & AI at Ainovate GmbH
Dirk Schiereck: Chair of Corporate Finance at Technische Universität Darmstadt
Volker Flögel: Head of Research at Quoniam Asset Management GmbH

Journal of Asset Management, 2024, vol. 25, issue 3, No 6, 303-325

Abstract: 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.

Keywords: Investments; Asset pricing; Trading costs; Market impact; Portfolio construction; Cost-efficiency (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41260-024-00353-4

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