The impact of transaction costs in portfolio optimization

Luc Chavalle and Luis Chavez-Bedoya

Journal of Economics, Finance and Administrative Science, 2018, vol. 24, issue 48, 288-311

Abstract: Purpose - 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. Design/methodology/approach - The paper opted for an empirical study analyzing the cost of rebalancing portfolios over a set period and dimensions. Stocks have been carefully selected using Bloomberg terminals, and portfolio designed then rebalanced using VBA programming. Over a few dimensions as type and number of stocks, holding period and trading strategy, the behavior of these different transaction costs has been compared. The analysis has been done for four different portfolios. Findings - 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. Research limitations/implications - The paper deals with a limited amount of Peruvian stocks. Researchers are encouraged to test the proposition further, including other dimensions. Practical implications - 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. Originality/value - This paper fulfils an identified need to study how much it costs to actively invest on the stock market in Peru.

Keywords: Transaction costs; Portfolio optimization; Portfolio turnover; G11; G12 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jefasp:jefas-12-2017-0126

DOI: 10.1108/JEFAS-12-2017-0126

Access Statistics for this article

Journal of Economics, Finance and Administrative Science is currently edited by Nestor U. Salcedo

More articles in Journal of Economics, Finance and Administrative Science from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().