Anginer, Deniz2012-03-192012-03-192010-05-01https://hdl.handle.net/10986/3803Theoretical 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.CC BY 3.0 IGOACCOUNTINGADVERSE EFFECTSADVERSE SELECTIONAGGREGATE MARKETAMOUNT OF CAPITALASSET PRICESASSET PRICINGASSET RETURNSASYMMETRIC INFORMATIONBASIS POINTSBENCHMARKSBIDBOOK VALUEBOOK-TO-MARKETBPSBROKERAGEBROKERAGE HOUSECAPITAL MARKETCHECKSCLOSING PRICECLOSING PRICESCOMMON MARKETCOMMON STOCKCOMMON STOCKSCONSUMER FINANCESDECISION MAKINGDEMOGRAPHICDISCOUNT BROKERAGEDIVERSIFIED PORTFOLIOSDUMMY VARIABLEDUMMY VARIABLESECONOMIC THEORYEFFICIENT MARKETEQUILIBRIUMEQUITIESEQUITY INVESTMENTSEQUITY MARKETSEQUITY PORTFOLIOEXCESS RETURNEXCESS RETURNSEXTERNAL INVESTORSFINANCESFINANCIAL MARKETSFINANCIAL SECURITIESFINANCIAL SERVICESFINANCIAL STUDIESFOREIGN ASSETFOREIGN MUTUAL FUNDSFOREIGN STOCKSGDPGROUP OF INVESTORSGROUPS OF INVESTORSHOLDINGHOLDING PERIODHOLDING PERIODSHOLDINGSHOUSEHOLD INCOMEILLIQUID ASSETSILLIQUID SECURITIESILLIQUID SECURITYILLIQUIDITYINCOME SHOCKSINCOMESINDIVIDUAL INVESTORINDIVIDUAL INVESTORSINDIVIDUAL SECURITIESINSTITUTIONAL INVESTORSINTEREST RATEINTERNATIONAL BANKINVENTORIESINVENTORYINVESTINGINVESTMENT ADVISORSINVESTMENT DECISIONSINVESTMENT HORIZONSINVESTMENT OPPORTUNITIESINVESTMENT PERFORMANCEINVESTMENT POLICIESINVESTOR BEHAVIORINVESTOR HOLDINGINVESTOR LOSSESINVESTOR RATIONALITYINVESTOR SENTIMENTINVESTOR WELFARELARGE CAPLARGE CAP STOCKLIQUID ASSETSLIQUID STOCKSLIQUIDITYLIQUIDITY PREMIUMLIQUIDITY RISKLONG-TERM INVESTORSMARGINAL UTILITYMARKET CAPITALIZATIONMARKET EQUILIBRIUMMARKET LEVELMARKET LIQUIDITYMARKET MAKERMARKET MAKERSMARKET MOVEMENTSMARKET PARTICIPANTSMARKET PORTFOLIOMARKET RETURNMARKET SUPPLYMARKET VOLATILITYMUTUAL FUNDMUTUAL FUND FLOWSMUTUAL FUND PERFORMANCEMUTUAL FUNDSNET RETURNNET RETURNSNOISE TRADERSNUMBER OF INVESTORNUMBER OF INVESTORSNUMBER OF SHARESORDER FLOWORDER FLOWSPOLITICAL ECONOMYPORTFOLIOPORTFOLIO DIVERSIFICATIONPORTFOLIO PERFORMANCEPORTFOLIO POSITIONSPORTFOLIOSPOSITIVE ABNORMAL RETURNSPREDICTABILITYPREVIOUS STUDIESPRICE FLUCTUATIONSPRIVATE SECTOR DEVELOPMENTPUBLIC POLICYPURCHASE PRICEPURCHASINGRATE OF RETURNRAW RETURNSRETAILRETAIL INVESTORRETAIL INVESTORSRETURNRETURNSRISK EXPOSURERISK NEUTRALROBUSTNESS CHECKSSALESALESSECURITIES TRANSACTIONSECURITIES TRANSACTIONSSECURITY HOLDINGSSECURITY PRICESSHORT-TERM RETURNSSHORT-TERM TRADINGSOPHISTICATED INVESTORSSPREADSTOCK CHARACTERISTICSSTOCK HOLDINGSSTOCK MARKETSTOCK PRICESTOCK RETURNSSTOCKSSUPPLIERSTAXTAX POLICYTERM STRUCTURE OF INTEREST RATESTIME HORIZONTRADESTRADINGTRADING ACTIVITYTRADING COSTSTRADING DAYTRADING DAYSTRADING VOLUMETRANSACTIONTRANSACTION COSTTRANSACTION COSTSTRANSACTION PRICETRANSACTIONS COSTSTURNOVERUNSOPHISTICATED INVESTORVOLATILITYWEALTHWorld Bank10.1596/1813-9450-5318