TY - JOUR
T1 - Two birds, one stone
T2 - Joint timing of returns and capital gains taxes
AU - Lei, Yaoting
AU - Li, Ya
AU - Xu, Jing
N1 - Publisher Copyright:
© 2019 INFORMS.
PY - 2020
Y1 - 2020
N2 - In asset return predictability, realized returns and future expected returns tend to move in opposite directions. This generates a tension between tax- and market-timing incentives. In this study, a portfolio choice problem in the presence of both return predictability and capital gains tax is examined. We characterize various features of the optimal trading strategy, and demonstrate that the optimal strategy helps mitigate the tension between market- and tax-timing. The calibrated model suggests that return predictability can significantly increase both the utility loss due to capital gains tax and the value of deferring capital gains realization.Overall, our results suggest that the nature of the asset return process can have important implications for the welfare effects of capital gains tax.
AB - In asset return predictability, realized returns and future expected returns tend to move in opposite directions. This generates a tension between tax- and market-timing incentives. In this study, a portfolio choice problem in the presence of both return predictability and capital gains tax is examined. We characterize various features of the optimal trading strategy, and demonstrate that the optimal strategy helps mitigate the tension between market- and tax-timing. The calibrated model suggests that return predictability can significantly increase both the utility loss due to capital gains tax and the value of deferring capital gains realization.Overall, our results suggest that the nature of the asset return process can have important implications for the welfare effects of capital gains tax.
KW - Capital gains tax
KW - Portfolio choice
KW - Return predictability
UR - http://www.scopus.com/inward/record.url?scp=85080066995&partnerID=8YFLogxK
U2 - 10.1287/mnsc.2018.3184
DO - 10.1287/mnsc.2018.3184
M3 - Article
AN - SCOPUS:85080066995
SN - 0025-1909
VL - 66
SP - 823
EP - 843
JO - Management Science
JF - Management Science
IS - 2
ER -