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Cost mitigation of factor investing in emerging equity markets

Author

Listed:
  • 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)

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.

Suggested Citation

  • Kay Stankov & Dirk Schiereck & Volker Flögel, 2024. "Cost mitigation of factor investing in emerging equity markets," Journal of Asset Management, Palgrave Macmillan, vol. 25(3), pages 303-325, May.
    • Handle: RePEc:pal:assmgt:v:25:y:2024:i:3:d:10.1057_s41260-024-00353-4
    DOI: 10.1057/s41260-024-00353-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Investments; Asset pricing; Trading costs; Market impact; Portfolio construction; Cost-efficiency;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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