Optimal Bond Trading with Tax Clienteles: A Discrete-Time Dynamic Trading Model

Yisong Tian

The Financial Review, 1996, vol. 31, issue 2, 313-41

Abstract: This study develops a discrete-time dynamic trading model for bond pricing under differential taxation. The model incorporates both the tax-timing option effect and the tax-clientele effect. Investors from all tax brackets have a chance to bid for a bond and the marginal investor is the one who is willing to pay the highest price. Simulation results show that interbracket trading occurs frequently as the interest rate changes, which enhances the value of the tax option. These results are shown to be robust to changes in interest rate process and tax regimes. Copyright 1996 by MIT Press.

Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:bla:finrev:v:31:y:1996:i:2:p:313-41

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