Transaction Costs, Trading Volume and Momentum Strategies

Xiafei Li, Chris Brooks and Joelle Miffre
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Xiafei Li: Nottingham University Business School
Joelle Miffre: EDHEC, Nice, France

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: This study considers the relationship between trading volumes, transactions costs, and the profitability of momentum strategies using data from the UK. We demonstrate that round-trip transactions costs for selling loser firms are around double those of buying winners, and in particular, the costs of selling low volume losers is more than twice as high as the cost of selling low volume winners. By contrast, there are only modest differences between the costs of buying winners and losers, irrespective of their volume levels. Yet we observe that, even in net terms, momentum strategies based on low volume stocks are more profitable than those using high volume stocks. We also note important differences between transactions costs measured using quoted versus effective spreads. Altogether, our findings should sound a word of caution for any study attempting to evaluate the impact of transactions costs on momentum profitability that such costs are very heterogeneous across firms and trade types, implying that they require careful calculation.

Keywords: Momentum profits; Transaction costs; bid-ask spreads; trading volume (search for similar items in EconPapers)
JEL-codes: G12 G19 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2009-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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