Çelim Yıldızhan, Research & Ideas

This paper has been written with Deniz Anginer and Xue Snow Han. Deniz presented an earlier version of the paper at the Western Finance Association meetings. Since then we significantly revised the paper changing more than half of the analyses and a large part of the story line.

Using close to 800,000 (2,000,000) transactions by 66,000 (303,000) households in the United States (in Finland), we show 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 amongst 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. We confirm our findings by analyzing changes to investors’ holding periods around exogenous shocks to stock liquidity.