Advanced Search
MyIDEAS: Login to save this article or follow this journal

Tax Basis And Nonlinearity In Cash Stream Valuation

Contents:

Author Info

  • Jaime Cuevas Dermody
  • R. Tyrrell Rockafellar
Registered author(s):

    Abstract

    The value of a future cash stream is often taken to be its net present value with respect to some term structure. This means that a linear formula is used in which each future payment is discounted by a factor deemed appropriate for the date on which the payment will be made. In a money market with taxes and shorting costs, however, there is no theoretical support for the existence of a universal term structure for this purpose. What is worse, reliance on linear formulas can be seriously inaccurate relative to true worth and can lead to paradoxes of disequilibrium. A consistent no-arbitrage theory of valuation in such a market requires instead that taxed and untaxed investors be grouped in separate classes with different valuation operators. Such operators are linear to scale but nonlinear with respect to addition. Here it is established that although these valuation operators provide general bounds applicable across an entire class, individual investors within a tax class can have more special operators because of the influence of existing holdings. These customized valuation operators have the feature of not even being linear to scale. In consequence of this nonlinearity, investors from the same or different tax classes can undertake advantageous trades even when the market is in a no-arbitrage state, but such trade opportunities are limited. Some degree of activity in financial markets can thereby be understood without appeal to differences in utility functions or temporary disequilibrium due to random disturbances. Copyright 1995 Blackwell Publishers.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9965.1995.tb00104.x
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Mathematical Finance.

    Volume (Year): 5 (1995)
    Issue (Month): 2 ()
    Pages: 97-119

    as in new window
    Handle: RePEc:bla:mathfi:v:5:y:1995:i:2:p:97-119

    Contact details of provider:
    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0960-1627

    Order Information:
    Web: http://www.blackwellpublishing.com/subs.asp?ref=0960-1627

    Related research

    Keywords:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Elyès Jouini, 2003. "Market imperfections , equilibrium and arbitrage," Post-Print halshs-00167131, HAL.
    2. Frank Milne & Edwin Neave, 2003. "A General Equilibrium Financial Asset Economy with Transaction Costs and Trading Constraints," Working Papers 1082, Queen's University, Department of Economics.
    3. Touzi, Nizar & Jouini, Elyès & Koehl, Pierre-François, 2000. "Optimal investment with taxes : an existence result," Economics Papers from University Paris Dauphine 123456789/5600, Paris Dauphine University.
    4. Jouini, Elyes & Koehl, Pierre-F. & Touzi, Nizar, 2000. "Optimal investment with taxes: an existence result," Journal of Mathematical Economics, Elsevier, vol. 33(4), pages 373-388, May.
    5. Napp, Clotilde, 2001. "Pricing issues with investment flows Applications to market models with frictions," Journal of Mathematical Economics, Elsevier, vol. 35(3), pages 383-408, June.
    6. Teemu Pennanen, 2011. "Arbitrage and deflators in illiquid markets," Finance and Stochastics, Springer, vol. 15(1), pages 57-83, January.
    7. Stehle, Richard & Jaschke, Stefan R. & Wernicke, S., 1998. "Tax clientele effects in the German bond market," SFB 373 Discussion Papers 1998,11, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    8. Bjarne Jensen, 2009. "Valuation before and after tax in the discrete time, finite state no arbitrage model," Annals of Finance, Springer, vol. 5(1), pages 91-123, January.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:bla:mathfi:v:5:y:1995:i:2:p:97-119. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.