Multiperiod Asset Pricing in the Presence of Transaction Costs and Taxes

Abstract

This paper models the e¤ect of transaction costs and taxes on asset pricing in a multi-period setting. It extends the study by Dermody and Rockafellar (DR) (1991), where it was shown that term structure valuation is agent-speci…c owing to agents' di¤erent tax classes, and that a multiplicity of valuation operators exists owing to di¤erent costs associated with long and short trades. Unlike DR who focus solely on the riskless bond, this paper analyses both risky and riskless security pricing in a more general framework of taxation. Similar to DR, the tightest no arbitrage present value range for a claim is derived here without the knowledge of investor preferences. The Jouini and Kallal (1995) analysis of short sales in a tax free economy is a special case of our model. We also establish the existence of a set of pseudo risk neutral probability measures, under which the discounted long price is a supermartingale and the discounted short price is a submartingale, is the necessary and su¢cient condition for no arbitrage.JEL classi…cation: G10, G12, C61.

A model for tax advantages of portfolios with many assets

“…Dammon et al (2004) also show how tax-deferral options can influence optimal portfolio choice, while Huang (2003) shows that location of assets in either a taxable or tax-deferred account can be separated from the allocation of funds to those assets. Other tax considerations include studies of asset pricing in the context of taxes, such as Ross (1987), Rockafellar (1991, 1995), and Wang and Poon (2000).…”

A Model for Tax Advantages of Portfolios with Many Assets

“…Dammon, et al (2004) also show how tax-deferral options can influence optimal portfolio choice, while Huang (2003) shows that location of assets in either a taxable or tax-deferred account can be separated from the allocation of funds to those assets. Other tax considerations include studies of asset pricing in the context of taxes, such as Ross (1987), Rockafellar (1991, 1995), and Wang and Poon (2000).…”