Tax-Induced Intertemporal Restrictions on Security Returns




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    • Bossaerts is from the California Institute of Technology, and Dammon is from the Graduate School of Industrial Administration, Carnegie Mellon University. We are grateful for valuable discussions with Rick Green, Steve Heston, Ravi Jagannathan, Bob Miller, Ken Singleton, Chester Spatt, Stan Zin, and the seminar participants at the California Institute of Technology, Carnegie Mellon University, the Federal Reserve Bank of Cleveland, INSEAD, Massachusetts Institute of Technology, Queen's University, the Stockholm School of Economics, the University of British Columbia, University of California, Irvine, University of California, Los Angeles, University of California, San Diego, the University of Southern California, the University of Utah, and the 1990 Western Finance Association Meetings. We gratefully acknowledge the research assistance of Bernt Oedegaard and the financial support provided by a Carnegie Mellon University faculty development grant. The first author also acknowledges the hospitality of the Sloan School of Management at Massachusetts Institute of Technology, where part of this article was written. Previous versions of this article were circulated under the title “A Consumption Based Asset Pricing Model with Personal Taxes: Theory and Empirical Tests.”


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.