Is Factor Investing Sustainable after Price Impact Costs? The Capacity of Factor Investing in Korea

This study investigates whether the profitability of various factor investments is sustainable after costs due to price impact, and estimates the capacity of strategies in the Korean stock market. With various initial amounts invested as of the end of December 2000, we analyze after-cost-returns on...

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Bibliographic Details
Published in:Sustainability 2019-09, Vol.11 (17), p.4797
Main Authors: Kim, Jungmu, Park, Yuen Jung
Format: Article
Language:English
Subjects:
Costs
Economics
Emerging markets
Institutional investments
Investment advisors
Investment policy
Market prices
Pension funds
Profitability
Profits
Securities markets
Stock exchanges
Sustainability
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Summary:This study investigates whether the profitability of various factor investments is sustainable after costs due to price impact, and estimates the capacity of strategies in the Korean stock market. With various initial amounts invested as of the end of December 2000, we analyze after-cost-returns on factor investing during the period from January 2000 to December 2017, and estimate the break-even fund size and maximal profit fund size. To this end, whenever rebalancing factor-investment portfolios based on trading rules, the number of shares of stocks to be bought and sold is computed and the price impact costs of the transactions are taken into account. This procedure computes the implicit cost of trading of factor investing to produce after-cost-returns for various initial amount invested. While the momentum and value factors perform well before price impact costs, the profitability factor performs better after price impact costs. More specifically, the break-even fund size is estimated to be 1.4 trillion Korean won (KRW), and the maximal profit generating fund size is estimated to be 750 billion KRW which could attain a monthly net profit of 1.9 billion KRW over the sample period.
ISSN:2071-1050
2071-1050
DOI:10.3390/su11174797