We carry out a comprehensive investigation of shrinkage estimators for asset allocation, and we find that size matters—the shrinkage intensity plays a significant role in the performance of the resulting estimated optimal portfolios. We study both portfolios computed from shrinkage estimators...

We investigate how transaction costs change the number of characteristics that are jointly significant for an investor's optimal portfolio, and hence, how they change the dimension of the cross section of stock returns. We find that transaction costs increase the number of significant...

We carry out a comprehensive investigation of shrinkage estimators for asset allocation, and we find that size matters -- the shrinkage intensity plays a significant role in the performance of the resulting estimated optimal portfolios. We study both portfolios computed from shrinkage estimators...

We show that the squared Sharpe ratio criterion considered by Barillas and Shanken (2017) is no longer appropriate to compare factor models in the presence of price-impact costs. Instead, we propose comparing factor models in terms of their mean-variance utility net of price-impact costs and...

A fundamental insight in finance is that there is a strong risk-return tradeoff. Moreira and Muir (2017) challenge this by showing that investors can increase Sharpe ratios by reducing exposure to risk factors when their volatility is high. However, Cederburg, O'Doherty, Wang, and Yan (2020)...

The growing number of institutions exploiting factor-investing strategies raises concerns that crowding may increase price-impact costs and erode profits. We identify a mechanism that alleviates crowding--trading diversification: institutions exploiting different characteristics can reduce each...