Do Individual Investors Ignore Transaction Costs?
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, consiste...
| Main Authors: | , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2017
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/406321497012325678/Do-individual-investors-ignore-transaction-costs http://hdl.handle.net/10986/27299 |
| Summary: | 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. |
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