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A NOTE ON THE EFFECTS OF TAXES ON OPTIMAL INVESTMENT

Authors


  • The research of C. Buescu and A. Cadenillas was supported by the Social Sciences and Humanities Research Council of Canada grants 410-2003-1401 and 410-2006-1069. The contributions of C. Buescu were made during his doctoral studies at the Department of Mathematical and Statistical Sciences of the University of Alberta.

Address correspondence to Abel Cadenillas, Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, Alberta T6G 2G1, Canada; e-mail: acadenil@math.ualberta.ca.

Abstract

We integrate two approaches to portfolio management problems: that of Morton and Pliska (1995) for a portfolio with risky and riskless assets under transaction costs, and that of Cadenillas and Pliska (1999) for a portfolio with a risky asset under taxes and transaction costs. In particular, we show that the two surprising results of the latter paper, results shown for a taxable market consisting of only a single security, extend to a financial market with one risky asset and one bond: it can be optimal to realize not only losses but also gains, and sometimes the investor prefers a positive tax rate.

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