Transaction costs and value premium

Vikas Agarwal and Lingling Wang

No 07-06, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: Value premium has been well documented in the finance literature. This paper empirically examines whether the value strategy of buying value stocks and selling growth stocks is profitable after controlling for transaction costs. Using the limited dependent variable estimate of transaction costs as in Lesmond, Ogden, and Trzcinka (1999), we find that value premium disappears as implementation of a value strategy involves substantial transaction costs. Our results after controlling for size and liquidity are robust to different ways of categorizing value and growth stocks used in the existing literature (Lakonishok, Shleifer, and Vishny (1994), and Fama and French (1993, 2006)) and to different methods of measuring transaction costs.

Keywords: Transaction costs; value stocks; growth stocks; value premium; liquidity (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:0706

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