Norges Bank

Working Paper

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

Author:
Randi Næs and Bernt Arne Ødegaard
Series:
Working Paper
Number:
11/2007

Abstract
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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ISSN 1502-8190 (online)

Published 22 December 2007 14:30
Published 22 December 2007 14:30