A Note on the Effects of Taxes on Optimal Investment

10 Pages Posted: 14 Sep 2007

See all articles by Cristin Buescu

Cristin Buescu

King's College London, Department of Mathematics

Abel Cadenillas

University of Alberta - Department of Mathematical and Statistical Sciences

Stanley R. Pliska

University of Illinois at Chicago - Department of Finance

Abstract

We integrate two approaches to portfolio management problems: that of Morton and Pliska (1995) for a portfolio with risky and riskless assets under transaction costs, and that of Cadenillas and Pliska (1999) for a portfolio with a risky asset under taxes and transaction costs. In particular, we show that the two surprising results of the latter paper, results shown for a taxable market consisting of only a single security, extend to a financial market with one risky asset and one bond: it can be optimal to realize not only losses but also gains, and sometimes the investor prefers a positive tax rate.

Suggested Citation

Buescu, Cristin and Cadenillas, Abel and Pliska, Stanley R., A Note on the Effects of Taxes on Optimal Investment. Mathematical Finance, Vol. 17, No. 4, pp. 477-485, October 2007, Available at SSRN: https://ssrn.com/abstract=1014197 or http://dx.doi.org/10.1111/j.1467-9965.2007.00312.x

Cristin Buescu

King's College London, Department of Mathematics ( email )

Strand
London, WC2R 2LS
United Kingdom

Abel Cadenillas (Contact Author)

University of Alberta - Department of Mathematical and Statistical Sciences ( email )

Edmonton, Alberta T6G 2G1
Canada
(780) 492-0572 (Phone)
(780) 492-6826 (Fax)

Stanley R. Pliska

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-996 7170 (Phone)

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