Liquidity Clienteles
46 Pages Posted: 3 Jun 2010 Last revised: 30 Apr 2011
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Liquidity Clienteles
Liquidity Clienteles: Transaction Costs and Investment Decisions of Individual Investors
Date Written: April 2011
Abstract
Investors’ holding periods determine how transaction costs are amortized and priced as liquidity premium in asset returns. Using a dataset containing two million trades made by over 66,000 households, this paper shows that transaction costs are an important determinant of investors’ holding periods. Consistent with the Amihud and Mendelson (1986) notion of liquidity clienteles investors with longer holding periods choose to hold less liquid securities in their portfolios. The relationship between holding periods and transaction costs is stronger among more sophisticated investors and investors that have holding periods that are positively related to transaction costs earn both higher gross and net returns.
Keywords: Transaction costs, Liquidity, Individual investor
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation
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