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Stock prices under pressure: how tax and interest rates drive returns at the turn of the tax year

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  • Johnny Kang
  • Tapio Pekkala
  • Christopher Polk
  • Ruy Ribeiro
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    Abstract

    We show that the level of interest rates determines the magnitude of mispricing at the turn of the tax year, as investors face the trade-o¤ between selling a temporarily depressed stock this year and selling next year, but delaying tax implications by one year. Interest rates do explain the predictable variation in US returns and selling behaviour around the turn of the year. Similar results in the UK provide out-of-sample confirmation, as tax and calendar years di¤er. Moreover, part of the variation in the risks and abnormal returns of size, value, and momentum factors can be linked to tax-motivated trading.

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    File URL: http://eprints.lse.ac.uk/43096/
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    Bibliographic Info

    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 43096.

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    Length: 48 pages
    Date of creation: Feb 2011
    Date of revision:
    Handle: RePEc:ehl:lserod:43096

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    Web page: http://www.lse.ac.uk/
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    Related research

    Keywords: tax-loss harvesting; January e¤ect; downward-sloping demand curves;

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