Do Taxes Matter in the CAPM?

Kruschwitz, Lutz; Löffler, Andreas

doi:10.1007/bf03342709

Cited by 4 publications

(28 citation statements)

References 15 publications

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“…I build on the work of Kruschwitz and Löffler (2009) who assumed a single-period mean-variance capital asset pricing model (CAPM) with a flat tax on capital gains and tax transfers back to investors. They find that prices in a world with taxes on returns are the same as prices in a world without taxes if the risk-free rate is zero or investors have constant absolute risk aversion mean-variance utility.…”

Section: Introductionmentioning

confidence: 99%

“…They find that prices in a world with taxes on returns are the same as prices in a world without taxes if the risk-free rate is zero or investors have constant absolute risk aversion mean-variance utility. Instead of regarding a mean-variance CAPM as in Kruschwitz and Löffler (2009), I construct a model with agents that value expected utility over consumption, i.e., a consumption CAPM with heterogeneous agents. The fundamental results from Kruschwitz and Löffler (2009) also hold for such economies, but I find important extensions.…”

Section: Introductionmentioning

confidence: 99%

“…Instead of regarding a mean-variance CAPM as in Kruschwitz and Löffler (2009), I construct a model with agents that value expected utility over consumption, i.e., a consumption CAPM with heterogeneous agents. The fundamental results from Kruschwitz and Löffler (2009) also hold for such economies, but I find important extensions.…”

Section: Introductionmentioning

confidence: 99%

“…Since taxes are not priced this leads to the same asset prices in both economies. Furthermore, I obtain the same portfolio rule as in Kruschwitz and Löffler (2009). This rule makes consumption profiles of investors equal in both economies with a zero risk-free rate.…”

Section: Introductionmentioning

confidence: 99%

“…It is only necessary to pick equal prices of the risk-free assets in both economies. In contrast to Kruschwitz and Löffler (2009), who use mean-variance utility arguments, I use SDF arguments to derive this result. Furthermore, I show that aggregate wealth after initial consumption in the no-tax economy is different to the one in the tax economies -even though prices are the same.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Effects of a capital gains tax on asset pricing

Krause¹

2017

Bus Res

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I extend and generalize the work of Kruschwitz and Löffler (BuRBusiness Research 2(2):171-178, 2009). I find that, with a zero risk-free rate, the implicit price of capital gains tax payments is zero. I provide conditions in stochastic discount factor language when a capital gains tax has no effect on asset prices for the case of a zero risk-free rate. A sufficient condition for price equality with a zero risk-fee rate is that agents consume the same in any state with and without taxes. Equilibria exist that guarantee equal consumptions, and they imply the same portfolio rules that Kruschwitz and Löffler (BuR-Business Research 2(2):171-178, 2009) find for the CAPM. Furthermore, for an exogenous non-zero risk-free rate, I show that exponential utility with multivariate normal payoffs, as well as linear marginal utility leave prices unchanged. Equilibrium prices are independent of capital gains taxes in those cases. However, total wealth of agents is different between the tax and the no-tax economy.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Effects of a capital gains tax on asset pricing

Krause¹

2017

Bus Res

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Differential taxation and security market lines–a clarification

Krause

Lahmann

2022

Rev Quant Finan Acc

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The literature on differential taxation of asset specific payoffs presents different representations of security market lines (SMLs), with puzzling features such as parallel lines and lines with the same intercept but different slopes - a security market fan. We show that these results can be traced back to using different combinations of pre-tax and after-tax figures for betas and expected returns. Above all, for betas based on returns and a stochastic discount factor (SDF), there is a single SML in after-tax expected return and after-tax beta space. Using pre-tax values for betas and/or expected returns leads to different representations in the respective beta and expected return space. With betas that use the market return instead of the SDF, it is important to distinguish whether tax payments are redistributed back to the agents. If they are, a single SML can only be obtained through a beta using the pre-tax market return and the after-tax return of single assets. In addition to SML representations, we also discuss differential taxation with respect to mean-variance frontiers in expected return and standard deviation spaces.

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Divergent interest rates in the theory of financial markets

Kruschwitz

Löffler

Lorenz

2019

The Quarterly Review of Economics and Finance

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We extend models of financial markets by incorporating divergent riskfree interest rates for borrowing and deposits. Divergent interest rates create arbitrage opportunities if each market participant is allowed both to borrow and lend money. In our model, we circumvent such arbitrage opportunities by allowing only one institution to act as a bank (granting risk-free credits and financial investments). The surplus of this bank has to be redistributed to the market participants. Assuming only one risky asset we show that-while not necessarily unique-an equilibrium always exists. We investigate the relation to a financial markets equilibrium based on a unique interest rate being intuitively determined as a (weighted) average from borrowing and deposit rate. We provide proof that this unique interest rate approximately generates correct asset prices only if every investor trades, the bank's proceeds are distributed equally among investors and the number of investors is rather large. Otherwise severe mispricings may result.

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Do Taxes Matter in the CAPM?

Cited by 4 publications

References 15 publications

Effects of a capital gains tax on asset pricing

Effects of a capital gains tax on asset pricing

Differential taxation and security market lines–a clarification

Divergent interest rates in the theory of financial markets

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