A simple behavioural model of investor holding periods under the presence of trading costs

ABSTRACT

We develop a simple behavioural model where changes in investor holding periods of stocks are a function of variations in levels and shocks of trading costs. We construct a value weighted portfolio of all stocks listed on the London Stock Exchange, over the time period of 1990–2014 in order to empirical examine the model. We establish that levels have a greater impact then unanticipated trading costs on investor holding periods. Our article outlines the importance of trading costs in determining investor portfolio construction.

KEYWORDS:

• Holding period
• bid-ask spread
• behavioural model

JEL CLASSIFICATION:

• G10
• G11
• C22

Notes

¹ The intermediate mathematical steps from Equations 1 to 4 are available from the authors upon request.

² Note that all the variables are estimated in logarithms, due to the excess skewness and kurtosis of the data.