- 1Most "anomalies" discovered by academics fail mainly because they trade high-turnover microcaps
- 2Value, Momentum, and Profitability survive transaction costs easily (low turnover)
- 3High-turnover strategies (like Idiosyncratic Volatility) require sophisticated trading to be profitable
- 4Investors must focus on "net" alpha, not "gross" alpha
- 5Efficient implementation is as important as the signal itself
#The Paper at a Glance
Title: A taxonomy of anomalies and their trading costs
Authors: Robert Novy-Marx and Mihail Velikov
Published: Review of Financial Studies, 2016
DOI: 10.1093/rfs/hhv042
Academics often assume trading is free. It isn't. Bid-ask spreads, commissions, and market impact eat into returns. Novy-Marx and Velikov categorized 23 famous anomalies based on their turnover and trading costs.
#The Three Categories
1. Low Turnover (Safe) **Examples:** Value, Profitability, Investment. **Verdict:** These strategies are highly profitable. They trade slowly (holding periods of 1-3 years), so transaction costs are negligible (<10% of gross profits).
2. Intermediate Turnover **Examples:** Momentum, Accruals. **Verdict:** Profitable, but costs matter. Momentum has ~100% annual turnover. You need to trade efficiently, but the premium is large enough to cover the costs.
3. High Turnover (Danger Zone) **Examples:** Idiosyncratic Volatility, Short-term Reversal. **Verdict:** Use with caution. These strategies require buying and selling stocks every few days or weeks. The transaction costs can wipe out 100% of the alpha if you aren't a sophisticated institutional trader (using limit orders, dark pools, etc.).
#Implications for Strategy Design
The paper teaches us to mitigate turnover. - Instead of rebalancing daily, rebalance monthly or quarterly. - Use "banding" (don't sell a stock just because it drops from Rank #1 to Rank #5; wait until it drops to Rank #20).
Strategies that look amazing on paper often fail because they ignore these frictions.
#How This Applies to Our Rankings
We designed the Blank Capital ranking system with implementability in mind, guided by this research.
- 1Universe Selection: We filter out microcaps (<$100M) where spreads are wide.
- 2Factor Selection: We prioritize Profitability and Value (Low Turnover) over high-frequency signals.
- 3Momentum Implementation: We use 12-minus-1 month momentum (slower moving) rather than short-term reversals.
This ensures that the "Top Ranked Stocks" you see on our site are actually tradeable by real investors, not just theoretical paper profits.
See our tradeable top rankings →
#Academic Source
Novy-Marx, R., & Velikov, M. (2016). "A taxonomy of anomalies and their trading costs." Review of Financial Studies, 29(1), 104-147.
Last updated: February 9, 2026