Nonlinear adjustment of investors' holding periods for common stocks in the presence of unobserved transactions costs: evidence from the UK equity market

V Boinet, A Gregoriou, Christos Ioannidis

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We estimate a model of holding period adjustment for four stock indices in the UK over the period 1980 to 2004. We postulate zone-symmetric investor preferences that result in an estimable ESTAR (Exponential Smooth Transition Autoregressive) model of the holding period for common stocks as a function of stock price volatility, market value and the bid-ask spread. These models suggest that there exists a nontrading zone due to the presence of transactions costs over and above the usual bid-ask spread. Normally such costs are not directly observed thus we need to deduce their influence by observing investors' responses to asset price shocks that necessitate trading. We show that the speed of adjustment increases as a function of deviations from the optimum. We present strong evidence of nonlinearities in the adjustment process that can be modelled by the proposed ESTAR model. We find that for heavily traded firms, such as those included in the FTSE 100, even small misalignments of the holding period from its 'optimal' value, trigger trading. However, transactions costs (other than the bid-ask spread) prevent such rapid adjustment in the other indices. Reprinted by permission of Routledge, Taylor and Francis Ltd.
Original languageEnglish
Pages (from-to)1221-1231
Number of pages11
JournalApplied Financial Economics
Volume18
Issue number15
DOIs
Publication statusPublished - 2008

Fingerprint

Equity markets
Investors
Nonlinear adjustment
Transaction costs
Bid/ask spread
Smooth transition
Autoregressive model
Stock price volatility
Deviation
Trigger
Adjustment process
Nonlinearity
Speed of adjustment
Misalignment
Asset prices
Costs
Market value
Stock index

Keywords

  • Investment analysis
  • Investors
  • Stock exchange
  • Portfolio management.

Cite this

Nonlinear adjustment of investors' holding periods for common stocks in the presence of unobserved transactions costs: evidence from the UK equity market. / Boinet, V; Gregoriou, A; Ioannidis, Christos.

In: Applied Financial Economics, Vol. 18, No. 15, 2008, p. 1221-1231.

Research output: Contribution to journalArticle

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