Patton and Weller 2017
“What You See Is Not What You Get: The Costs of Trading Market Anomalies” by Andrew J. Patton and Brian M. Weller (Duke University; 2017 working paper, published 2020 in the Journal of Financial Economics) measures the real-world implementation gap between paper factor returns and what mutual funds actually deliver, using two non-parametric methods that avoid estimating microstructure cost models. They find annual implementation costs of 2.2-8.5% and conclude that after costs typical funds earn low returns to value and no statistically distinguishable return to momentum. It appears in this vault as the pessimistic anchor on Transaction Costs and Slippage: it confirms that high-turnover anomalies can be erased by frictions for any trader lacking elite execution.
Connections
- Transaction Costs and Slippage — reports_underperformance, source: https://public.econ.duke.edu/~ap172/Patton_Weller_MF_31oct17.pdf
- Frazzini Israel and Moskowitz 2018 — contradicts, reaches a far more optimistic net-of-cost conclusion for elite execution, source: https://www.aqr.com/Insights/Research/Working-Paper/Trading-Costs-of-Asset-Pricing-Anomalies