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Liquidity clienteles : transaction costs and investment decisions of individual investors, Volume 1
Author:Anginer, Deniz; Country:World;
Date Stored:2010/05/26Document Date:2010/05/01
Document Type:Policy Research Working PaperSubTopics:Emerging Markets; Economic Theory & Research; Markets and Market Access; Debt Markets; Mutual Funds
Language:EnglishRegion:The World Region
Report Number:WPS5318Collection Title:Policy Research working paper ; no. WPS 5318
Volume No:1  

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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