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Tax-Induced Intertemporal Restrictions on Security Returns

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  • Bossaerts, Peter
  • Dammon, Robert M.

Abstract

This article derives testable restrictions on equilibrium asset prices when investors have the option to time the realization of their capital gains and losses for tax purposes. The tax-timing option alters both the magnitude and timing of equity returns relative to those in a tax-free model. The tax-induced restrictions are empirically examined, and the tax rates and preference parameters are estimated. While the tax-free model can be rejected in favor of the tax-based model as the specified alternative, the tax-based model is still unable to adequately explain cross-sectional differences in asset returns. Copyright 1994 by American Finance Association.
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Suggested Citation

  • Bossaerts, Peter & Dammon, Robert M., 1991. "Tax-Induced Intertemporal Restrictions on Security Returns," Working Papers 763, California Institute of Technology, Division of the Humanities and Social Sciences.
  • Handle: RePEc:clt:sswopa:763
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    Cited by:

    1. Clemens Sialm, 2009. "Tax Changes and Asset Pricing," American Economic Review, American Economic Association, vol. 99(4), pages 1356-1383, September.
    2. Sialm, Clemens, 2006. "Stochastic taxation and asset pricing in dynamic general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 511-540, March.
    3. Campbell R. Harvey & Yan Liu & Heqing Zhu, 2014. ". . . and the Cross-Section of Expected Returns," NBER Working Papers 20592, National Bureau of Economic Research, Inc.
    4. Kang, Johnny & Pekkala, Tapio & Polk, Christopher & Ribeiro, Ruy, 2011. "Stock prices under pressure: how tax and interest rates drive returns at the turn of the tax year," LSE Research Online Documents on Economics 43096, London School of Economics and Political Science, LSE Library.
    5. Paul Harrison & Harold Zhang, "undated". "Cyclical Variation in the Risk and Return Relation," GSIA Working Papers 1997-27, Carnegie Mellon University, Tepper School of Business.

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