Hi Felix, regarding your questions:

1) Costs are incurred for each transaction, i.e. when buying and selling.
2) If we rebalance on an annual basis, the conclusion does not change. The microcap index returns will improve, but Momentum requires frequent turnover and becomes worse if not rebalanced frequently.

The reason for the different transaction costs is to show a more realistic view of investing across market caps. Indeed most researchers exclude transaction costs, but it is pointless from our perspective if the results are attractive in theory and not applicable to reality.