Portfolio Tax Trading with Carry-Over Losses

78 Pages Posted: 4 Mar 2008 Last revised: 25 Jun 2015

See all articles by Paul Ehling

Paul Ehling

BI - Norwegian Business School

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce

Sanjay Srivastava

Georgia State University-Robinson College of Business

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business

Chunyu Yang

BI Norwegian Business School

Date Written: June 2015

Abstract

We study portfolio choice with multiple stocks and capital gain taxation assuming that capital losses can only offset current or future realized capital gains. We show through backtesting, using empirical distributions, that optimal equity holdings over an extended period are significantly lower on average than benchmark holdings suggested in the literature. Using Value and Growth or Small and Large portfolios, the backtests show that allocations remain persistently under-diversified. Carry-over losses have large economic significance since they can dramatically shrink the no-trade region. Finally, the backtested economic cost of incorrectly modeling capital losses is at least 8 percent of lifetime wealth.

Keywords: portfolio choice, capital gain taxation, limited use of capital losses, carry-over losses

JEL Classification: G11, H20

Suggested Citation

Ehling, Paul and Gallmeyer, Michael F. and Srivastava, Sanjay and Tompaidis, Stathis and Yang, Chunyu, Portfolio Tax Trading with Carry-Over Losses (June 2015). EFA 2008 Athens Meetings Paper; McCombs Research Paper Series No. IROM-02-08. Available at SSRN: https://ssrn.com/abstract=1003034 or http://dx.doi.org/10.2139/ssrn.1003034

Paul Ehling

BI - Norwegian Business School ( email )

N-0442 Oslo
Norway
+47 46410505 (Phone)

Michael F. Gallmeyer (Contact Author)

University of Virginia (UVA) - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)

HOME PAGE: http://www.commerce.virginia.edu/faculty_research/facultydirectory/Pages/Gallmeyer.aspx

Sanjay Srivastava

Georgia State University-Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Chunyu Yang

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Register to save articles to
your library

Register

Paper statistics

Downloads
531
Abstract Views
2,983
rank
52,603
PlumX Metrics