t Towards Cost Transparency: Estimating Transaction Costs for Smart Beta Strategies

OpinioPro Selection
By July 19, 2019 17:34

t Towards Cost Transparency: Estimating Transaction Costs for Smart Beta Strategies

Using transparent and replicable estimates of stocks’ effective spread, we compute transaction cost levels and net performance of investable smart beta indices. We show that the extra performance relative to the broad cap-weighted index does not disappear once we account for their transaction costs independently from the measure used to estimate the effective spreads. We show that our results hold across strategies loading on several factors and several geographical areas with different levels of liquidity. We also analyse the main determinants of transaction costs. We show that the effective spreads decreased considerably after changes in market microstructure led to increased competition. Finally, we show that the benefit from diversification of transaction costs are higher across regions than across factors.

OpinioPro Selection
By July 19, 2019 17:34

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