Small stocks' time-varying spreads predict future return gap between small and large stocks. To optimally exploit such predictability, the investor captures current risk premium by purchasing at large spreads with substantially reduced turnover; uses an aim-in-front-of-the-target approach to trade-off between future risk premium and current transaction costs; and meets hedging demand at low costs. Strong interaction between transaction costs and return predictability leads to large losses from myopic trading. Greater variability of the spread is advantageous for investors who trade optimally but detrimental for investors who trade myopically. The spread-based return predictability significantly increases the investment value of small stocks.

中文翻译：

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采摘带刺的玫瑰：基于价差的回报可预测性的最佳交易

小型股票随时间变化的利差预测小型股票和大型股票之间的未来回报差距。为了最佳地利用这种可预测性，投资者通过以大价差买入并大幅减少换手率来获取当前的风险溢价；采用先于目标的方法来权衡未来风险溢价和当前交易成本；并以低成本满足套期保值需求。交易成本和回报可预测性之间的强烈相互作用导致短视交易造成巨大损失。价差的较大波动性对于最佳交易的投资者有利，但对于短视交易的投资者不利。基于价差的回报可预测性显着增加了小型股票的投资价值。