A transaction-cost perspective on the multitude of firm characteristics Articles uri icon

publication date

  • May 2020

start page

  • 2180

end page

  • 2222


  • 5


  • 33

International Standard Serial Number (ISSN)

  • 0893-9454

Electronic International Standard Serial Number (EISSN)

  • 1465-7368


  • We investigate how transaction costs change the number of characteristics that are jointlysignificant for an investor's optimal portfolio and, hence, how they change the dimensionof the cross-section of stock returns. We find that transaction costs increase the number ofsignificant characteristics from 6 to 15. The explanation is that, as we show theoreticallyand empirically, combining characteristics reduces transaction costs because the tradesin the underlying stocks required to rebalance different characteristics often cancel out.Thus, transaction costs provide an economic rationale for considering a larger number ofcharacteristics than that in prominent asset-pricing models