A Model for Tax Advantages of Portfolios with Many Assets
John R. Birge
University of Chicago - Booth School of Business
S. Alex Yang
London Business School
August 1, 2005
Journal of Banking and Finance, Vol. 31, No. 11, 2007
Taxable portfolios present challenges for optimization models with even a limited number of assets. Holding many assets, however, has a distinct tax advantage over holding few assets. In this paper, we develop a model that takes an extreme view of a portfolio as a continuum of assets to gain the broadest possible advantage from holding many assets. We find the optimal strategy for trading in this portfolio in the absence of transaction costs and develop bounding approximations on the optimal value. We compare the results in a simulation study to a portfolio consisting only of a market index and show that the multi-asset portfolio's tax advantage can lead either to significant consumption or bequest increases.
Number of Pages in PDF File: 25
Keywords: Taxes, portfolio optimization
JEL Classification: C61, G11, H24
Date posted: September 4, 2005 ; Last revised: January 8, 2015
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