Comparing Cost-Mitigation Techniques

Abstract

This article compares the efficacy of three common transaction-cost-mitigation techniques: limiting a strategy to cheap-to-trade securities, rebalancing a strategy less frequently, and “banding,” which imposes a higher hurdle for actively trading into a position than for maintaining an established position. All three strategies significantly reduce transaction costs, but the techniques that reduce turnover have a less negative impact on strategy gross performance than limiting trade to low-cost securities has. Banding is more effective than simply reducing rebalancing frequencies, because banding yields similar trading-cost reductions while maintaining a better exposure to the underlying signal used to select stocks.