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Do Individual Investors Ignore Transaction Costs?

57 Pages Posted: 13 Jun 2017  

Deniz Anginer

World Bank Research

Xue Snow Han

San Francisco State University

Celim Yildizhan

University of Georgia - C. Herman and Mary Virginia Terry College of Business

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Date Written: June 9, 2017

Abstract

Using close to 800,000 (2,000,000) transactions by 66,000 (303,000) households in the United States (in Finland), this paper shows that individual investors with longer holding periods choose to hold less liquid stocks in their portfolios, consistent with Amihud and Mendelson's (1986) theory of liquidity clienteles. The relationship between holding periods and transaction costs is stronger among more financially sophisticated households. Households whose holding periods are positively related to transaction costs also earn higher gross returns on their investments before accounting for transaction costs, suggesting that attention to non-salient transaction costs is an indication of investing ability. The main findings are confirmed by analyzing changes in investors' holding periods around exogenous shocks to stock liquidity.

Suggested Citation

Anginer, Deniz and Han, Xue Snow and Yildizhan, Celim, Do Individual Investors Ignore Transaction Costs? (June 9, 2017). World Bank Policy Research Working Paper No. 8098. Available at SSRN: https://ssrn.com/abstract=2985525

Deniz Anginer (Contact Author)

World Bank Research ( email )

1818 H Street, NW
Washington, DC 20433
United States

Xue Snow Han

San Francisco State University ( email )

1600 Holloway Avenue
San Francisco, CA 94132
United States

Celim Yildizhan

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

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