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Portfolio Tax Trading with Carryover Losses

Author

Listed:
  • Paul Ehling

    (BI Norwegian Business School, 0484 Oslo, Norway)

  • Michael Gallmeyer

    (McIntire School of Commerce, University of Virginia, Charlottesville, Virginia 22904)

  • Sanjay Srivastava

    (J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia 30303)

  • Stathis Tompaidis

    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

  • Chunyu Yang

    (BI Norwegian Business School, 0484 Oslo, Norway)

Abstract

We study portfolio choice with multiple stocks and capital gains taxation, assuming that capital losses can only offset current or future realized capital gains. We show, through backtesting using empirical distributions, that optimal equity holdings over an extended period are significantly lower on average than benchmark holdings suggested in the literature. Using value and growth or small and large portfolios, the backtests show that allocations remain persistently underdiversified. Carryover losses have large economic significance since they can dramatically shrink the no-trade region. Finally, the backtested economic cost of incorrectly modeling capital losses is at least 8% of lifetime wealth.

Suggested Citation

  • Paul Ehling & Michael Gallmeyer & Sanjay Srivastava & Stathis Tompaidis & Chunyu Yang, 2018. "Portfolio Tax Trading with Carryover Losses," Management Science, INFORMS, vol. 64(9), pages 4156-4176, September.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:9:p:4156-4176
    DOI: 10.1287/mnsc.2017.2733
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    References listed on IDEAS

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    Cited by:

    1. McKeever, Daniel & Rydqvist, Kristian, 2022. "Tax-loss harvesting under uncertainty," Journal of Banking & Finance, Elsevier, vol. 140(C).
    2. D. Th. Vezeris & C. J. Schinas & Th. S. Kyrgos & V. A. Bizergianidou & I. P. Karkanis, 2020. "Optimization of Backtesting Techniques in Automated High Frequency Trading Systems Using the d-Backtest PS Method," Computational Economics, Springer;Society for Computational Economics, vol. 56(4), pages 975-1054, December.
    3. Baojun Bian & Xinfu Chen & Min Dai & Shuaijie Qian, 2021. "Penalty method for portfolio selection with capital gains tax," Mathematical Finance, Wiley Blackwell, vol. 31(3), pages 1013-1055, July.

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