Working Paper

Transaction costs in an emerging market: the case of Indonesia

Abstract: Despite the dramatic increase in the flow of funds to emerging stock markets, relatively little is known about the cost of transacting on these markets. This paper estimates the execution costs of trading on a representative emerging market stock exchange, the Jakarta Stock Exchange (JSX). We find that execution costs are affected by the difficulty of the trade, the size of the firm traded, and the broker executing the trade. Surprisingly, we find that execution costs on the JSX are only modestly higher than average execution costs in several non-U.S. developed stock markets. In addition, we find that trades initiated by foreigners have a much larger impact on the price than trades initiated by local investors. Since the impact is not reversed following the trade, this raises the possibility that foreign trades may signal future investment flows.

Keywords: Indonesia; Stock market;

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 1996

Number: 96-11