The Capital Gain Lock-In Effect and Long-Horizon Return Reversal

Posted: 29 Aug 2001  

Peter Klein

Simon Fraser University (SFU) - Finance Area

Abstract

This paper develops and tests an asset pricing model that allows for the presence of a capital gain lock-in effect. The principal empirical implication of this model is that stock returns exhibit reversal behavior over long horizons because of investors' accrued capital gains. Empirical tests on the cross-section of
stock returns find that long-horizon return reversal is primarily attributable to the effect of investors' accrued capital
gains and that the effect is nonlinear in the manner predicted by the model. These finds are robust to the addition of size and past total return to the empirical tests.

Keywords: Capital gains taxation, Lock-in effect, General equilibrium, Return reversal

JEL Classification: G12, H20

Suggested Citation

Klein, Peter, The Capital Gain Lock-In Effect and Long-Horizon Return Reversal. Journal of Financial Economics, Vol. 59, No. 1, January 2001. Available at SSRN: https://ssrn.com/abstract=251886

Peter Charles Klein (Contact Author)

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada
604-291-5605 (Phone)

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