Immunization in Markets with Tax-Clientele Effects: Evidence from the Canadian Market
Posted: 15 Jun 1994
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: Suggested Citation