Tax Effects in Term Structure Estimation



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    • Financial Economist, Commodity Futures Trading Commission. Most of this research was completed while the author was Assistant Professor, College of Management, Georgia Institute of Technology. The author wishes to thank an anonymous referee for significant contributions.


This study is a refinement and an extension of an earlier study by McCulloch of tax effects in the regression equation for term structure estimation. This study includes tests for tax effects and heteroskedasticity, a reconsideration of the need for an instrumental variable, and a search for the capital gains tax rate in addition to the ordinary-income tax rate. There are two major findings: (1) statistically significant tax-induced bias in the non-tax-adjusted equation and (2) evidence that the capital gains tax is misspecified in the tax-adjusted equation.