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The Contribution of Transaction Costs to Expected Stock Returns: A Novel Measure

Author

Listed:
  • Kazuhiro Hiraki

    (Institute for Monetary and Economic Studies, Bank of Japan,)

  • George Skiadopoulos

    (School of Economics and Finance, Queen Mary University of London and Department of Banking and Financial Management, University of Piraeus,)

Abstract

We document that a theoretically founded, real-time, and easy-to-implement option-based measure, termed synthetic-stock difference (SSD), accurately estimates the part of stock’s expected return arising from stock’s transaction costs. We calculate SSD for U.S. optionable stocks. SSD can be more than 10% per annum, it can fluctuate significantly over time and its cross-sectional dispersion widens over market crises periods. We confirm the accuracy of SSD by empirically verifying the predictions of a general asset pricing setting with transaction costs. First, we document its predicted type of connection with various proxies of stocks’ transaction costs. Second, we conduct simple asset pricing tests which render further support. Our setting allows explaining the size of alphas reported by previous literature on the predictive ability of deviations from put-call parity.

Suggested Citation

  • Kazuhiro Hiraki & George Skiadopoulos, 2023. "The Contribution of Transaction Costs to Expected Stock Returns: A Novel Measure," Working Papers 946, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:946
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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/wp946.pdf
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    More about this item

    Keywords

    Transaction costs; Put-call parity; Return predictability; Informational content of options;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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