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The impact of transaction costs in portfolio optimization: A comparative analysis between the cost of trading in Peru and the United States

Author

Listed:
  • Chavalle, Luc

    (IESEG School of Management, Paris, France)

  • Chavez-Bedoya, Luis

    (Universidad ESAN, Lima, Peru)

Abstract

This paper aims to analyze the impact of transaction costs in portfolio optimization in Peru. The study aims to compare the transaction costs structure applied in Peru with respect to the ones applied in the USA, and over a few dimensions. The paper provides empirical insights about how a retail investor actively trading in Peru can pay up to 14 times more in transaction costs than trading the same portfolio in the USA. These comparatively high transaction costs prevent retail investors to trade in the Peruvian stock market while fueling illiquidity to this market. The paper includes implications for any retail investor that wants to invest in Peruvian stocks, giving an insight about how expensive it is to actively rebalance a portfolio in Peru.

Suggested Citation

  • Chavalle, Luc & Chavez-Bedoya, Luis, 2019. "The impact of transaction costs in portfolio optimization: A comparative analysis between the cost of trading in Peru and the United States," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 24(48), pages 288-311.
    • Handle: RePEc:ris:joefas:0150
    as

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    File URL: https://www.emerald.com/insight/content/doi/10.1108/JEFAS-12-2017-0126/full/pdf
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    References listed on IDEAS

    as
    1. Leland, Hayne E., 1999. "Optimal Portfolio Management with Transactions Costs and Capital Gains Taxes," Research Program in Finance, Working Paper Series qt0fw6k0hm, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Ronald Ravinesh Kumar & Peter Josef Stauvermann & Aristeidis Samitas, 2022. "An Application of Portfolio Mean-Variance and Semi-Variance Optimization Techniques: A Case of Fiji," JRFM, MDPI, vol. 15(5), pages 1-25, April.
    2. He, Xinao & Xu, Runguo & Sun, Kai & Wang, Jian, 2024. "Population intensity, location choice, and investment portfolio selection: A case of emerging economies," International Review of Financial Analysis, Elsevier, vol. 94(C).
    3. Yan, Dong & Lin, Sha & Hu, Zhihao & Yang, Ben-Zhang, 2022. "Pricing American options with stochastic volatility and small nonlinear price impact: A PDE approach," Chaos, Solitons & Fractals, Elsevier, vol. 163(C).

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    More about this item

    Keywords

    Transaction costs; Portfolio optimization; Portfolio turnover;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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