Optimal Portfolio Implementation with Transactions Costs and Capital Gains Taxes

Topics:
Taxes
Tags:
Finance,
Financial Planning,
Free Trade,
Taxes
Source:
finance-research.net

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Overview: This paper consider a multi-asset investment fund that in the absence of transactions costs and/or taxes would hold assets in constant proportions. The problem is: what trading strategy should be implemented in the presence of transactions costs and/or capital gains taxes?Article explain how high trading costs will reduce initial commitments to illiquid markets. The results are contrasted with the ad hoc approach that reduces expected returns to reflect transactions costs.Capital gains taxes add complexity due to the stochastic evolution of cost bases. Paper derive the optimal no-trade region and the region requiring tax loss selling. Losses are not immediately realized when there are positive transactions costs, but only when they exceed a critical level. Capital gains taxes lead to lower initial investment levels.

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Format: HTML & PDF | Size: 248KB | Date: Dec 2000 | Pages: 55

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