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The Optimal Trading and Pricing of Securities with Asymmetric Capital Gains Taxes and Transaction Costs

REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 3

Posted: 23 Oct 1996  

Robert M. Dammon

Carnegie Mellon University

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business

Abstract

This paper explores the optimal trading and pricing of taxable securities with asymmetric capital gains taxes and transaction costs. In the long-term region, investors realize all gains below some critical cutoff level, which we derive analytically. In the short-term region, investors defer all gains and, depending upon the time remaining in the short-term region, may also defer small losses. Contrary to common intuition, deferral of short-term losses can be optimal even without transaction costs. The value of tax timing is considerably higher under the optimal trading strategy than under alternative strategies previously analyzed. The impact of offset rules is also explored.

JEL Classification: E62

Suggested Citation

Dammon, Robert M. and Spatt, Chester S., The Optimal Trading and Pricing of Securities with Asymmetric Capital Gains Taxes and Transaction Costs. REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 3. Available at SSRN: https://ssrn.com/abstract=7835

Robert M. Dammon

Carnegie Mellon University ( email )

GSIA
Pittsburgh, PA 15213
United States
412-268-3696 (Phone)

Chester S. Spatt (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-8834 (Phone)
412-268-6689 (Fax)

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