Immunization in Markets with Tax-Clientele Effects: Evidence from the Canadian Market

Posted: 15 Jun 1994

See all articles by Eliezer Z. Prisman

Eliezer Z. Prisman

York University - Schulich School of Business

Yisong S. Tian

York University - Schulich School of Business

Abstract

Empirical immunization studies have considered the efficacy of immunization strategies in which the durations of assets and of liabilities are equated against a strategy involving maturity matching. However all these studies have ignored tax effects. In the presence of tax-clientele effects immunization requires that the portfolio consists only of bonds that are correctly priced for a particular clientele. Testing for these effects therefore requires the identification of the correctly priced bonds for the investors in the clientele. However since bond prices contain noise determining these bonds is still an unresolved problem. Consequently an empirical test of the magnitude of the error caused by ignoring taxes may be an impossible task in some markets and indeed has never been conducted. The Canadian bond market provides perfect laboratory conditions for such a test. Tax-clientele effects are present in the Canadian market and among the clienteles is a representative clientele. This paper examines the tax effects on immunization strategies. The results show that the error caused by ignoring tax effects is not negligible and practitioners should use immunization with reference to tax effects.

JEL Classification: G11, G12, G18, H20

Suggested Citation

Prisman, Eliezer Z. and Tian, Yisong Sam, Immunization in Markets with Tax-Clientele Effects: Evidence from the Canadian Market. J of Financial and Quantitative Analysis, Vol. 29 No. 2, June 1994. Available at SSRN: https://ssrn.com/abstract=54393

Eliezer Z. Prisman (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
(416) 736-2100 ext. 77948 (Phone)
(416) 736-5687 (Fax)

Yisong Sam Tian

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100, ext 77943 (Phone)
416-736-5687 (Fax)

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