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Optimal portfolio choice with wash sale constraints

Listed author(s):
  • Astrup Jensen, Bjarne
  • Marekwica, Marcel
Registered author(s):

    We analytically solve the portfolio choice problem in the presence of wash sale constraints in a two-period model with one risky asset. Our results show that wash sale constraints can heavily affect portfolio choice of investors with unrealized losses. The trading behavior of such investors is to a large extent driven by the desire to realize those losses, either immediately by sharply decreasing the holding of assets carrying unrealized losses, or indirectly by increasing such holdings in order to prepare for a decrease in a future period to earn the tax rebate payment. Our findings are robust to increasing the number of trading dates and introducing a second risky asset and a correlation structure.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0165188911001138
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    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 35 (2011)
    Issue (Month): 11 ()
    Pages: 1916-1937

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    Handle: RePEc:eee:dyncon:v:35:y:2011:i:11:p:1916-1937
    DOI: 10.1016/j.jedc.2011.06.007
    Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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