Stock Market Liquidity and the Trading Costs of Asset Pricing Anomalies

Using a large database of the US institutional investors' trades, this paper sheds new light on the question of anomalies-based portfolio transaction costs. We find that the real costs paid by large investors to implement the well-identified Fama-French anomalies (size, value, investment and profitability) and Carhart momentum are significantly lower than documented in the previous studies. We show that the average investor pays an annual transaction cost of 16bps for size, 23bps for value, 31bps for investment and profitability and 222bps for momentum. The five strategies generate statistically significant net returns after accounting for transaction costs of respectively 4.29%, 1.98%, 4.45%, 2.69%, and 2.86%. When the market impact is taken into account, transaction costs reduce substantially the profitability of the well-known anomalies for large portfolios, however, these anomalies remain profitable for average size portfolios. The break-even capacities in terms of fund size are $ 184 billion for size, $ 38 billion for value, $ 17 billion for profitability, $ 14 billion for investment and $ 410 million for momentum.