Liquidity Clienteles : Transaction Costs and Investment Decisions of Individual Investors
Theoretical papers link the liquidity premium to the optimal trading decisions of investors facing transaction costs. In particular, investors' holding periods determine how transaction costs are amortized and priced in asset returns. Using a...
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100526133302 http://hdl.handle.net/10986/3803 |
| Summary: | Theoretical papers link the liquidity
premium to the optimal trading decisions of investors facing
transaction costs. In particular, investors' holding
periods determine how transaction costs are amortized and
priced in asset returns. Using a unique data set containing
two million trades, this paper investigates the relationship
between holding periods and transaction costs for 66,000
households from a large discount brokerage. The author finds
that transaction costs are an important determinant of
investors' holding periods, after controlling for
household and stock characteristics. The relationship
between holding periods and transaction costs is stronger
among more sophisticated investors. Households with longer
holding periods earn significantly higher returns after
amortized transaction costs, and households that have
holding periods that are positively related to transaction
costs earn both higher gross and net returns. The author
shows that there is correlation in the demand for liquid
assets across households and, consistent with the notion of
flight to liquidity, this demand increases during times of
low market liquidity. Households with higher incomes and
with higher wealth invested in the stock market supply
liquidity when market liquidity is low. |
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