Stochastic Taxation and Asset Pricing in Dynamic General Equilibrium

48 Pages Posted: 23 Apr 2002

See all articles by Clemens Sialm

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

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Abstract

Tax rates have fluctuated considerably since federal income taxes were introduced in the United States in 1913. This paper analyzes the effects of stochastic taxation on asset prices in a dynamic general equilibrium model. Stochastic taxation affects the after-tax returns of both risky and safe assets. Whenever taxes change, bond and equity prices adjust to clear the asset markets. These price adjustments affect assets with long durations, such as equities and long-term bonds, more than short-term assets. Under plausible conditions, investors require higher term and equity premia as compensation for the risk introduced by tax changes.

Keywords: Tax Changes, Asset Pricing, Equity Premium, Term Premium

JEL Classification: G12, H20, E44

Suggested Citation

Sialm, Clemens, Stochastic Taxation and Asset Pricing in Dynamic General Equilibrium. AFA 2003 Washington, DC Meetings; Journal of Economic Dynamics and Control, Forthcoming. Available at SSRN: https://ssrn.com/abstract=306744 or http://dx.doi.org/10.2139/ssrn.306744

Clemens Sialm (Contact Author)

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

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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