Holding Period Definition
Holding Period is defined as a certain time duration that allows an investor to keep the security with himself. This is also considered a specified time period during purchasing and selling activity. It is of note that the actual time span of this activity starts from the purchase of an asset until it is sold. This time period is really significant as it involves calculations regarding capital gains. Similarly, the calculations regarding any losses are made that occur during this holding period. There are two types of holding periods that are known as the short and long term; hence, capital gains for both of these periods are taxed with a different mechanism.
A Little More on What is a Holding Period
In the financial field, HPR (holding period return) is the return (output) on a portfolio or an asset that is kept for a certain time span. This whole process is believed as the simplest measure with great significance of investment performance. In the context of investment, holding period return shows a shift in the investment, portfolio or asset value during a certain time period. HPR shows any types of profits or losses, that are the capital gains and sum-income divided by the starting period value. Every type of profit from assets is known as capital gains.
HPR = (End Value – Initial Value) / Initial Value
Here, End Value income means the revenue that is gained from an investment, e.g. dividends There are certain financial risks of a holding period. These financial risks appear when an organization gives a sales quote to its retail client for a specified time duration and asks the firm to sign this commodity offer. With financial perspective, such offer by any organization is a huge financial disadvantage because of the market price change in the wholesale market. The offering organization reduces this type of risk by adding a risk premium to the wholesale cost of products or commodities.
Example of Holding Period
There are different types of holding periods used with different business settings. For instance, the holding period against security begins from the very first day of purchasing and lasts until selling time. The short-term period is always shorter than 1 year. However, in comparison, the long-term period is categorized as the time that is of one year or elapses beyond one year.
The following example can assist to understand the concept of short or long term holding periods. i.e. if security is purchased on July 1, 2012, while it was sold on December 30, 2012, would be considered a short-term holding period. Because the time does not elapses 6-month period. Similarly, the concept behind the long-term holding period is easy to understand by counting the time frame that is more than one year. If an item is bought on March 1, 2017, and its selling took place on April 31, 2018, this makes 13 months time duration and it is categorized as a long-term holding period.
References for Holding Period
Academic Research on Long Term Holding Period
Long‐term market overreaction or biases in computed returns?, Conrad, J., & Kaul, G. (1993). The Journal of Finance, 48(1), 39-63. The study shows calculation bias in the implementation of returns to the previous long-term investment strategy because they are estimated by a single (monthly) period returns. The process of cumulation shows measurement errors. The study also focuses on remaining returns of organizations as these have no link to overreaction. The research lays the foundation for further investigations in the context of event studies to evaluate the impact or influence of information events.
The volatility of long–term interest rates and expectations models of the term structure, Shiller, R. J. (1979). Journal of political Economy, 87(6), 1190-1219. The study sheds light on the volatile situation of long as well as short-term interest rates. The expectations from implemented long-term interest models are not encouraging because they exceed from the boundaries mentioned in the model. This excess volatility involves forecastability in relation to long rates. It has been observed that long rates often fall rather their expected rise that has been assumed in presented models.
Do long‐term shareholders benefit from corporate acquisitions?, Loughran, T., & Vijh, A. M. (1997). The Journal of Finance, 52(5), 1765-1790. The paper evaluates the results of a number of organizations’ acquisitions and their financial benefits for shareholders. The study indicates that negative return in five years period that was estimated 25% while some organization exceeded with 61.7 returns because of complying with cash tender offer. However, shareholders did not earn positive returns in post-acquisition periods.
Managerial decisions and long‐term stock price performance, Mitchell, M. L., & Stafford, E. (2000). The Journal of Business, 73(3), 287-329. The author re-examines a model concerning with managerial decisions and abnormal stock-price performance in the corporate sector. Managerial decisions such as acquisitions, issues related to equity and purchases have no connection with stock performance. The study indicates that evaluations and estimations concerning abnormal returns are small.
Underperformance in long-run stock returns following seasoned equity offerings, Spiess, D. K., & Affleck-Graves, J. (1995). Journal of Financial Economics, 38(3), 243-267. The study critically evaluates underperformance and equity issues in relation to long-run stock returns. The issue of underperformance continues even after the trading system is controlled. The study figures out that managers are most advantaged in initial as well as seasons equity markets.
Reforming executive compensation: Focusing and committing to the long–term, Bhagat, S., & Romano, R. (2009). Yale J. on Reg., 26, 359. The research investigates reform proposal to improve executive compensation situation especially in organizations that get financial help from the state. Compensation reforms will help to manage simples policies that will bring benefits for long-term shareholders. Study purposes that any shares given to executive should not be sold after four years of their retirement. Instead, a small amount should be given to resolve their taxing issues. Such initiatives would help not only executives but are beneficial for longer-term investors. The decrease in managerial incentives would save the spoil of public resources as well.
Earnings management and the long‐run market performance of initial public offerings, Teoh, S. H., Welch, I., & Wong, T. J. (1998). The Journal of Finance, 53(6), 1935-1974. This paper elaborates the earning management system and overall performance related to the long-run market of IPOs (Initial Public Offerings). The real results of high accruals related to a single annual IPO would experience a weak performance of stock return even after three years. Seasonal equity offerings issued by managers are almost 20% fewer. Such differences hold great significance with economic and statistical perspectives.
Valuation ratios and the long-run stock market outlook: an update, Campbell, J. Y., & Shiller, R. J. (2001). National bureau of economic research. The paper discusses the historical context of stock market variables, earning ratios from 1871 until 2000 in the light of available annual and quarterly data from 12 different countries. Financial market models indicate that earning and dividend ratios are helpful to forecast future growth and productivity level. The research also indicates the impacts of these models on changing stock prices. This paper throws complete light of stock market behaviour in the twentieth century.
Mixed-asset portfolio composition with long–term holding periods and uncertainty, Ziobrowski, A., Caines, R., & Ziobrowski, B. (1999). Journal of Real Estate Portfolio Management, 5(2), 139-144. The study with the help of bootstrap analysis presents a real estate mixed-asset portfolio composition in relation to long-term period and the level of that exists. Studies indicate that limited holding periods better in results than a five-year holding period. The investment in real estate is consistent because the role of fund managers is accurate.
What moves the stock and bond markets? A variance decomposition for long‐term asset returns, Campbell, J. Y., & Ammer, J. (1993). The journal of finance, 48(1), 3-37. The writer focuses on the use of vector autoregressive framework to identify the reasons that move the stock and bond markets. The research also focuses on the role of the small interest rate as they have an influence on returns.
Improved methods for tests of long‐run abnormal stock returns, Lyon, J. D., Barber, B. M., & Tsai, C. L. (1999). The Journal of Finance, 54(1), 165-201. The research focuses on the use of two different types of improved methods that help to test long-run abnormal stock returns. The first strategy is known as a traditional framework while the second strategy is based on calculations related to abnormal returns.