Model Comparison with Transaction Costs

Andrew Detzel, Robert Novy-Marx, Mihail Velikov

Research output: Contribution to journalArticlepeer-review

7 Scopus citations


Failing to account for transaction costs materially impacts inferences drawn when evaluating asset pricing models, biasing tests in favor of those employing high-cost factors. Ignoring transaction costs, Hou, Xue, and Zhang (2015, Review of Financial Studies, 28, 650–705) q-factor model and Barillas and Shanken (2018, The Journal of Finance, 73, 715–754) six-factor models have high maximum squared Sharpe ratios and small alphas across 205 anomalies. They do not, however, come close to spanning the achievable mean-variance efficient frontier. Accounting for transaction costs, the Fama and French (2015, Journal of Financial Economics, 116, 1–22; 2018, Journal of Financial Economics, 128, 234–252) five-factor model has a significantly higher squared Sharpe ratio than either of these alternative models, while variations employing cash profitability perform better still.

Original languageEnglish (US)
JournalJournal of Finance
StateAccepted/In press - 2023

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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