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Liquidity and asset pricing: Evidence on the role of investor holding period

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We use data on actual holding periods for all investors in a stock market over a 10 year period to investigate the links between holding periods, liquidity, and asset returns. Microstructure measures of liquidity are shown to be important determinants of the holding period decision of individual investors. We also find evidence that the average holding period is different for different investor groups. Interestingly, we find that turnover is an imperfect proxy for holding period. Moreover, while both turnover and spread are related to stock returns, holding period is not. Our results suggest that the link between liquidity and asset prices found in numerous empirical studies cannot be explained by models such as Amihud and Mendelson (1986) where investors merely want to be compensated for exogenous trading costs.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2007/WP-200711/
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Paper provided by Norges Bank in its series Working Paper with number 2007/11.

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Length: 31 pages
Date of creation: 11 Jan 2008
Date of revision:
Handle: RePEc:bno:worpap:2007_11

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Keywords: Market microstructure; Liquidity; Holding period;

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  1. Øyvind Bøhren & Bernt Arne Ødegaard, 2001. "Patterns of Corporate Ownership: Insights from a unique data set," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 27, pages 55-86.
  2. Van den Berg, Gerard J., 2000. "Duration Models: Specification, Identification, and Multiple Durations," MPRA Paper 9446, University Library of Munich, Germany.
  3. Shing-yang Hu, 1997. "Trading Turnover and Expected Stock Returns: The Trading Frequency Hypothesis and Evidence from the Tokyo Stock Exchange," Finance 9702001, EconWPA.
  4. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  5. Mila Getmansky & Andrew W. Lo & Igor Makarov, 2003. "An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns," NBER Working Papers 9571, National Bureau of Economic Research, Inc.
  6. Nickell, Stephen J, 1979. "Estimating the Probability of Leaving Unemployment," Econometrica, Econometric Society, vol. 47(5), pages 1249-66, September.
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  8. Randi Næs & Johannes A. Skjeltorp & Bernt Arne Ødegaard, 2009. "What factors affect the Oslo Stock Exchange?," Working Paper 2009/24, Norges Bank.
  9. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
  10. Huang, Ming, 2003. "Liquidity shocks and equilibrium liquidity premia," Journal of Economic Theory, Elsevier, vol. 109(1), pages 104-129, March.
  11. Dimitri Vayanos, 1998. "Transaction costs and asset prices : a dynamic equilibrium model," LSE Research Online Documents on Economics 451, London School of Economics and Political Science, LSE Library.
  12. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  13. B. Espen Eckbo & David C. Smith, 1998. "The Conditional Performance of Insider Trades," Journal of Finance, American Finance Association, vol. 53(2), pages 467-498, 04.
  14. Datar, Vinay T. & Y. Naik, Narayan & Radcliffe, Robert, 1998. "Liquidity and stock returns: An alternative test," Journal of Financial Markets, Elsevier, vol. 1(2), pages 203-219, August.
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