Portfolio Choice and Transactions Taxes

New Evidence on Taxes and Portfolio Choice

Optimal Portfolio Management with Transactions Costs and Capital Gains Taxes

We examine the optimal trading strategy for an investment fund which in the absence of transactions costs would like to maintain assets in exogenously fixed proportions, e.g. 60/30/10 in stocks, bonds and cash. Transactions costs are assumed to be proportional, but may differ with buying and selling, and may include a (positive) capital gains tax component. We show that the optimal policy invol...

Optimal Portfolio Implementation: Asset Management with Transactions Costs and Capital Gains Taxes

While there is an extensive literature, both theoretical and empirical, on determining optimal asset ratios for funds with alternative objectives, little has been written about an equally-important aspect of money management: how to implement these strategies optimally in the presence of transactions costs and capital gains taxes. Yet trading to implement investment objectives is regularly done...

Capital Gains Taxes and Portfolio Rebalancing

The major friction that investors face in rebalancing their portfolios is capital gains taxes, which are triggered by the sale of assets. In this article, we examine the impact of an investor’s capital gains tax liability and existing risk exposure upon the optimal portfolio and rebalancing decisions. We capture the trade-off over the investor’s lifetime between the tax costs and diversificatio...

The Effect of Taxes on Portfolio Choice: Evidence from Panel Data Spanning the Tax Reform

This paper estimates the effect of marginal tax rates on demands for various financial assets, using the 1983-1989 Survey of Consumer Finances (SCF) panel. In the crosssection, marginal tax rates appear to have a strong and statistically significant influence on portfolio allocations, even after controlling for income and wealth. For example, people with high tax rates tend to hold larger share...