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Stock prices under pressure; How tax and interest rates drive returns at the turn of the tax year

Author

Listed:
  • 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.

Suggested Citation

  • JOhnny Kang & Tapio Pekkala & Christopher Polk & Ruy Ribeiro, 2011. "Stock prices under pressure; How tax and interest rates drive returns at the turn of the tax year," FMG Discussion Papers dp671, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp671
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/DP671_2011_Stockprice.pdf
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    Cited by:

    1. Matti Keloharju & Juhani T. Linnainmaa & Peter Nyberg, 2014. "Common Factors in Return Seasonalities," NBER Working Papers 20815, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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