Multiperiod Asset Pricing in the Presence of Transaction Costs and Taxes

Lancaster University Working Paper No. 2000-02

Posted: 16 Mar 2000

See all articles by Pengguo Wang

Pengguo Wang

Xfi, University of Exeter

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester; Alan Turing Institute

Date Written: February 2000

Abstract

This paper models the effect 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-specific owing to agents' different tax classes, and that a multiplicity of valuation operators exists owing to different 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 sufficient condition for no arbitrage.

JEL Classification: G10, G12, C61

Suggested Citation

Wang, Pengguo and Poon, Ser-Huang, Multiperiod Asset Pricing in the Presence of Transaction Costs and Taxes (February 2000). Lancaster University Working Paper No. 2000-02, Available at SSRN: https://ssrn.com/abstract=214221 or http://dx.doi.org/10.2139/ssrn.214221

Pengguo Wang

Xfi, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

Ser-Huang Poon (Contact Author)

Alliance Manchester Business School, University of Manchester ( email )

Alliance Manchester Business School
Booth Street West
Manchester, Manchester M15 6PB
United Kingdom
+44 161 275 4031 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.manchester.ac.uk/research/Ser-huang.poon/

Alan Turing Institute ( email )

British Library, 96 Euston Road
London, NW12DB
United Kingdom

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