Liquidity, Volatility and Equity Trading Costs Across Countries and Over Time

Abstract

Actual investment performance reflects the underlying strategy of the portfolio manager and the execution costs incurred in realizing those objectives. Execution costs, especially in illiquid markets, can dramatically reduce the notional return to an investment strategy. This paper examines the interactions between cost, liquidity and volatility, and analyses their determinants using panel data for 42 countries from September 1996 to December 1998. We document wide variation in trading costs across countries; emerging markets, in particular, have significantly higher trading costs even after correcting for factors such as market capitalization Goldman Sachs Asset Management provided many useful comments. Any errors are entirely our own. and volatility. We analyse the inter-relationships between turnover, equity trading costs and volatility, and investigate the impact of these variables on equity returns. In particular, we show that increased volatility, acting through costs, reduces a portfolio's expected return. However, higher volatility reduces turnover also, mitigating the actual impact of higher costs on returns. Further, turnover is inversely related to trading costs, providing a possible explanation for the increase in turnover in recent years. The results demonstrate that the composition of global efficient portfolios can change dramatically when cost and turnover are taken into account.

Physical versus Synthetic Exchange Traded Funds. Which One Replicates Better?

“…The largest value comes from emerging market ETFs (0.61). These findings are consistent with [14] and [15]. Interestingly is the fact that expense ratios for synthetic ETFs are larger than for physical ETFs, although expense ratios vary significantly across ETFs' categories.…”

Where Is the Market? Evidence from Cross-Listings in the United States

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Information costs and home bias: an analysis of US holdings of foreign equities

“…This measure, shown in Figure 8 and analyzed in Willoughby (1997) and Domowitz, Glen, and Madhaven (2000), is comprised of three components: commissions, fees, and market impact costs. 24 As the figure shows, it is difficult to discern a relationship between trading costs and our measure of bias across the 41 countries for which the measure is available.…”