This paper has been written with Deniz Anginer and Xue Snow Han. Using close to 800,000 transactions by 66,000 households in the United States and close to 2,000,000 transactions by 303,000 households 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.


Recent findings in the behavioral finance literature suggest that individual investors tend to ignore non-salient costs when making investment decisions. Our findings are interesting because we show that individual investors are cognizant of at least one particular type of non-salient cost, namely the cost of trading stocks, revealing a unique aspect of their rationality. 

Çelim Yıldızhan, Research & Ideas