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 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.

Bibliographic Details

Main Author:	Anginer, Deniz
Format:	Policy Research Working Paper biblioteca
Language:	English
Published:	2010-05-01
Subjects:	ACCOUNTING, ADVERSE EFFECTS, ADVERSE SELECTION, AGGREGATE MARKET, AMOUNT OF CAPITAL, ASSET PRICES, ASSET PRICING, ASSET RETURNS, ASYMMETRIC INFORMATION, BASIS POINTS, BENCHMARKS, BID, BOOK VALUE, BOOK-TO-MARKET, BPS, BROKERAGE, BROKERAGE HOUSE, CAPITAL MARKET, CHECKS, CLOSING PRICE, CLOSING PRICES, COMMON MARKET, COMMON STOCK, COMMON STOCKS, CONSUMER FINANCES, DECISION MAKING, DEMOGRAPHIC, DISCOUNT BROKERAGE, DIVERSIFIED PORTFOLIOS, DUMMY VARIABLE, DUMMY VARIABLES, ECONOMIC THEORY, EFFICIENT MARKET, EQUILIBRIUM, EQUITIES, EQUITY INVESTMENTS, EQUITY MARKETS, EQUITY PORTFOLIO, EXCESS RETURN, EXCESS RETURNS, EXTERNAL INVESTORS, FINANCES, FINANCIAL MARKETS, FINANCIAL SECURITIES, FINANCIAL SERVICES, FINANCIAL STUDIES, FOREIGN ASSET, FOREIGN MUTUAL FUNDS, FOREIGN STOCKS, GDP, GROUP OF INVESTORS, GROUPS OF INVESTORS, HOLDING, HOLDING PERIOD, HOLDING PERIODS, HOLDINGS, HOUSEHOLD INCOME, ILLIQUID ASSETS, ILLIQUID SECURITIES, ILLIQUID SECURITY, ILLIQUIDITY, INCOME SHOCKS, INCOMES, INDIVIDUAL INVESTOR, INDIVIDUAL INVESTORS, INDIVIDUAL SECURITIES, INSTITUTIONAL INVESTORS, INTEREST RATE, INTERNATIONAL BANK, INVENTORIES, INVENTORY, INVESTING, INVESTMENT ADVISORS, INVESTMENT DECISIONS, INVESTMENT HORIZONS, INVESTMENT OPPORTUNITIES, INVESTMENT PERFORMANCE, INVESTMENT POLICIES, INVESTOR BEHAVIOR, INVESTOR HOLDING, INVESTOR LOSSES, INVESTOR RATIONALITY, INVESTOR SENTIMENT, INVESTOR WELFARE, LARGE CAP, LARGE CAP STOCK, LIQUID ASSETS, LIQUID STOCKS, LIQUIDITY, LIQUIDITY PREMIUM, LIQUIDITY RISK, LONG-TERM INVESTORS, MARGINAL UTILITY, MARKET CAPITALIZATION, MARKET EQUILIBRIUM, MARKET LEVEL, MARKET LIQUIDITY, MARKET MAKER, MARKET MAKERS, MARKET MOVEMENTS, MARKET PARTICIPANTS, MARKET PORTFOLIO, MARKET RETURN, MARKET SUPPLY, MARKET VOLATILITY, MUTUAL FUND, MUTUAL FUND FLOWS, MUTUAL FUND PERFORMANCE, MUTUAL FUNDS, NET RETURN, NET RETURNS, NOISE TRADERS, NUMBER OF INVESTOR, NUMBER OF INVESTORS, NUMBER OF SHARES, ORDER FLOW, ORDER FLOWS, POLITICAL ECONOMY, PORTFOLIO, PORTFOLIO DIVERSIFICATION, PORTFOLIO PERFORMANCE, PORTFOLIO POSITIONS, PORTFOLIOS, POSITIVE ABNORMAL RETURNS, PREDICTABILITY, PREVIOUS STUDIES, PRICE FLUCTUATIONS, PRIVATE SECTOR DEVELOPMENT, PUBLIC POLICY, PURCHASE PRICE, PURCHASING, RATE OF RETURN, RAW RETURNS, RETAIL, RETAIL INVESTOR, RETAIL INVESTORS, RETURN, RETURNS, RISK EXPOSURE, RISK NEUTRAL, ROBUSTNESS CHECKS, SALE, SALES, SECURITIES TRANSACTION, SECURITIES TRANSACTIONS, SECURITY HOLDINGS, SECURITY PRICES, SHORT-TERM RETURNS, SHORT-TERM TRADING, SOPHISTICATED INVESTORS, SPREAD, STOCK CHARACTERISTICS, STOCK HOLDINGS, STOCK MARKET, STOCK PRICE, STOCK RETURNS, STOCKS, SUPPLIERS, TAX, TAX POLICY, TERM STRUCTURE OF INTEREST RATES, TIME HORIZON, TRADES, TRADING, TRADING ACTIVITY, TRADING COSTS, TRADING DAY, TRADING DAYS, TRADING VOLUME, TRANSACTION, TRANSACTION COST, TRANSACTION COSTS, TRANSACTION PRICE, TRANSACTIONS COSTS, TURNOVER, UNSOPHISTICATED INVESTOR, VOLATILITY, WEALTH,
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
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