Essays on asymmetry of trading costs, factor investment profitability, and mispricing attenuation

Abstract

This dissertation consists of three assays on asymmetry of trading costs, factor investment profitability, and mispricing attenuation. The first essay investigates whether the asymmetry in transaction costs has interrelationships with overall economic uncertainties in addition to the liquidity crisis. We start by estimating the transaction costs, measured by the effect of the net turnover rate on the return of stock prices, namely the implicit costs of trading in the form of price shocks. Our empirical analysis shows that at a time when overall economic uncertainties are magnified, the price impact costs sharply rise and further the buy-sell asymmetry in price impact costs appears to be outstandingly reduced. The second essay examines whether price impact costs influence factor investment profitability based on twelve anomalies. It is found that for a given initial investment level, price impact costs aggravate the amount invested after rebalancing, and further larger initial investment funds cause lower rate of returns as well as higher the price impact costs. On the other hand, larger the initial investment funds can also experience larger amount of profits, and hence there exists a fund level which generates maximum amount of profits. With price impact costs, profitability trading strategies are the most profitable, but their profits eventually disappear after break-even fund sizes are engaged. Further, equal weighting scheme underperforms value weighting scheme. The third essay is an empirical study on whether mispricing can be attenuated due to a relation with investor sentiment and corporate vulnerability. First finding is that the mispricing of securities can be improved as a whole, mainly from short leg. The underpricing and overpricing are attenuated with high investor sentiment and low corporate vulnerability, respectively. Next, once mispricing has been improved, the stock prices subsequently converge to their fundamental values. The features are outstandingly shown for non-investment anomalies.