Sep

4

I have read that holding periods for stocks are getting shorter. I could ask if lower average holding terms in one period are predictive of higher volatility in the next period. -  A reader.

If you visit Google Scholar, you will find hundreds of papers that address the relationship between market friction and turnover, average holding periods, etc.

Changes in price volatility can be associated with many things. But I find it difficult to see any theoretical economic logic why increased turnover (shorter holding periods) should predict higher price volatility. In fact, I think the opposite can be compellingly argued. That is, if most people don't want to change their holdings, then those people who want to transact will pay a higher price for an execution.

Here's my thought process: Turnover and friction are inversely correlated. Friction consists of commissions, fees and capital gains taxes, bid/ask spreads, and the true depth/size "liquidity" on the bid/ask. Of these, commissions and bid/ask spreads have been in a secular decline since 1990 and I believe this explains the bulk of the data in that chart. Secondly, if you are subject to a 90% capital gains tax and a $1 per share commission, your holding period will increase a lot. That was the case from the 1960's to the 1982. (Note that capital gains taxes increased with Obama's election in 2008.)

Also, in bull markets, one generally sees increased participation and increased turnover; in sideways or bear markets, there are usually fewer transactions, wider bid/ask spreads, and obviously, higher risk premia. This is generally true in most markets including real estate, collectibles and stocks.


Comments

WordPress database error: [Table './dailyspeculations_com_@002d_dailywordpress/wp_comments' is marked as crashed and last (automatic?) repair failed]
SELECT * FROM wp_comments WHERE comment_post_ID = '10608' AND comment_approved = '1' ORDER BY comment_date

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search