Re: The New Finance by Haugen
I've read one of his other books, "The Inefficient Stock Market", which wound up being a wordier version of his paper "Commonality in the determinants of expected stock returns" (Journal of Financial Economics, 1996).
He raises some good points, but seems to be unaware of the effects trading costs have on the actual returns of a portfolio: "Such costs – often called ‘execution costs’ because they are associated with the execution of investment strategies – include commissions, bid/ask spreads, opportunity costs of waiting, and price impact from trading (see Loeb, 1983 and Wagner, 1993 for further discussion), and they can have a substantial impact on investment performance. For example, Perold (1988) observes that a hypothetical or ‘paper’ portfolio constructed according to the Value Line rankings outperforms the market by almost 20% per year during the period from 1965 to 1986, whereas the actual portfolio – the Value Line Fund – outperformed the market by only 2.5% per year, the difference arising from execution costs.2 This 'implementation shortfall’ is surprisingly large and underscores the importance of execution-cost control, particularly for institutional investors whose trades often comprise a large fraction of the average daily volume of many stocks." (Bertsimas, D. & Lo, A. W. (1998), ‘Optimal control of execution costs’, Journal of Financial Markets pp. 1–50.)
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11-15-2005, 01:08 PM
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