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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

    ()

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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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp671.

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Date of creation: Feb 2011
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Handle: RePEc:fmg:fmgdps:dp671

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