A NOTE ON THE EFFECTS OF TAXES ON OPTIMAL INVESTMENT

Cristin Buescu, Abel Cadenillas and Stanley R. Pliska

Mathematical Finance, 2007, vol. 17, issue 4, 477-485

Abstract: We integrate two approaches to portfolio management problems: that of Morton and Pliska (1995) for a portfolio with risky and riskless assets under transaction costs, and that of Cadenillas and Pliska (1999) for a portfolio with a risky asset under taxes and transaction costs. In particular, we show that the two surprising results of the latter paper, results shown for a taxable market consisting of only a single security, extend to a financial market with one risky asset and one bond: it can be optimal to realize not only losses but also gains, and sometimes the investor prefers a positive tax rate.

Date: 2007
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