Optimal Trading of a Security When There are Taxes and Transaction Costs

Posted: 16 Feb 1999

See all articles by Abel Cadenillas

Abel Cadenillas

University of Alberta - Department of Mathematical and Statistical Sciences

Stanley R. Pliska

University of Illinois at Chicago - Department of Finance

Abstract

We study the problem of investing in securities in order to maximize the after-tax rate of return. We consider a single stock modeled as geometric Brownian motion along with the objective of maximizing the long-run growth rate of after-tax wealth. We show that it is optimal not only to cut short the losses, but also the profits, even though there is no distinction between short and long term tax rates. This surprising result may be due to the possibility of using the tax system to reduce after-tax volatility.

JEL Classification: G12

Suggested Citation

Cadenillas, Abel and Pliska, Stanley R., Optimal Trading of a Security When There are Taxes and Transaction Costs. Available at SSRN: https://ssrn.com/abstract=149136

Abel Cadenillas

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 (Contact Author)

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)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
709
PlumX Metrics