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The asset location puzzle: Taxes matter

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  • Zhou, Jie
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Abstract

Asset location decisions observed in practice deviate substantially from the predictions of theoretical models. This paper develops a life cycle model with a progressive tax system to quantitatively evaluate two explanations of the asset location puzzle. We find that taxes matter significantly for asset location decisions. The key mechanism is the benefits from pre-tax accumulation. We also find that for reasonable parameter values the precautionary motive is not quantitatively important in terms of its effect on asset location.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165-1889(08)00207-8
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 4 (April)
Pages: 955-969

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:4:p:955-969
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

Keywords: Tax-deferred accounts Asset location Portfolio choice;

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Cited by:

  1. Larsen, Linda Sandris & Munk, Claus, 2012. "The costs of suboptimal dynamic asset allocation: General results and applications to interest rate risk, stock volatility risk, and growth/value tilts," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 266-293.
  2. Katarzyna Romaniuk, 2013. "Pension fund taxation and risk-taking: should we switch from the EET to the TEE regime?," Annals of Finance, Springer, vol. 9(4), pages 573-588, November.
  3. Anson T. Y. Ho & Jie Zhou, 2016. "Housing and Tax-Deferred Retirement Accounts," Staff Working Papers 16-24, Bank of Canada.
  4. Zhou, Jie, 2012. "Life-cycle stock market participation in taxable and tax-deferred accounts," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1814-1829.
  5. Astrup Jensen, Bjarne & Marekwica, Marcel, 2011. "Optimal portfolio choice with wash sale constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1916-1937.
  6. Marekwica, Marcel & Schaefer, Alexander & Sebastian, Steffen, 2013. "Life cycle asset allocation in the presence of housing and tax-deferred investing," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1110-1125.
  7. Marekwica, Marcel, 2012. "Optimal tax-timing and asset allocation when tax rebates on capital losses are limited," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2048-2063.
  8. Ebrahim, M. Shahid & Mathur, Ike & ap Gwilym, Rhys, 2014. "Integrating corporate ownership and pension fund structures: A general equilibrium approach," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 553-569.
  9. Fischer, Marcel & Kraft, Holger & Munk, Claus, 2013. "Asset allocation over the life cycle: How much do taxes matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2217-2240.
  10. Hans Fehr, 2009. "Computable Stochastic Equilibrium Models and Their Use in Pension- and Ageing Research," De Economist, Springer, vol. 157(4), pages 359-416, December.

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