IDEAS home Printed from https://ideas.repec.org/a/spr/finsto/v3y1999i2p137-165.html
   My bibliography  Save this article

Optimal trading of a security when there are taxes and transaction costs

Author

Listed:
  • Abel Cadenillas

    (Department of Mathematical Sciences, University of Alberta, Edmonton, Alberta, Canada T6G 2G1)

  • Stanley R. Pliska

    (University of Illinois at Chicago, 601 South Morgan Street, Chicago, IL 60607-7124, USA Manuscript)

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.

Suggested Citation

  • Abel Cadenillas & Stanley R. Pliska, 1999. "Optimal trading of a security when there are taxes and transaction costs," Finance and Stochastics, Springer, vol. 3(2), pages 137-165.
    • Handle: RePEc:spr:finsto:v:3:y:1999:i:2:p:137-165
    Note: received: June 1997; final version received: February 1998
    as

    Download full text from publisher

    File URL: http://link.springer.de/link/service/journals/00780/papers/9003002/90030137.pdf
    Download Restriction: Access to the full text of the articles in this series is restricted
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

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


    Cited by:

    1. Christoph Kuhn & Bjorn Ulbricht, 2013. "Modeling capital gains taxes for trading strategies of infinite variation," Papers 1309.7368, arXiv.org, revised Jun 2015.
    2. Zura Kakushadze, 2015. "Combining Alphas via Bounded Regression," Papers 1501.05381, arXiv.org, revised Oct 2015.
    3. Stathis Tompaidis & Sanjay Srivastava & Michael Gallmeyer & Paul Ehling, 2008. "Portfolio Choice with Capital Gain Taxation and the Limited Use of Losses," 2008 Meeting Papers 769, Society for Economic Dynamics.
    4. Zura Kakushadze, 2015. "Combining Alphas via Bounded Regression," Risks, MDPI, vol. 3(4), pages 1-17, November.
    5. 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.
    6. Zura Kakushadze, 2014. "Notes on Alpha Stream Optimization," Papers 1406.1249, arXiv.org, revised Mar 2015.
    7. Zura Kakushadze, 2014. "Mean-Reversion and Optimization," Papers 1408.2217, arXiv.org, revised Feb 2016.
    8. Christoph Kuhn & Budhi Arta Surya & Bjorn Ulbricht, 2014. "Optimal Selling Time of a Stock under Capital Gains Taxes," Papers 1501.00026, arXiv.org.
    9. Zura Kakushadze & Willie Yu, 2017. "Notes on Fano Ratio and Portfolio Optimization," Papers 1711.10640, arXiv.org, revised Apr 2018.
    10. Frank Seifried, 2010. "Optimal investment with deferred capital gains taxes," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 71(1), pages 181-199, February.
    11. Gallmeyer, Michael F. & Kaniel, Ron & Tompaidis, Stathis, 2006. "Tax management strategies with multiple risky assets," Journal of Financial Economics, Elsevier, vol. 80(2), pages 243-291, May.
    12. Zura Kakushadze, 2014. "Combining Alpha Streams with Costs," Papers 1405.4716, arXiv.org, revised Jan 2015.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:finsto:v:3:y:1999:i:2:p:137-165. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.