Heuristic portfolio trading rules with capital gain taxes

Marcel Fischer and Michael Gallmeyer

Journal of Financial Economics, 2016, vol. 119, issue 3, 611-625

Abstract: We study the out-of-sample performance of portfolio trading strategies used when an investor faces capital gain taxation and proportional transaction costs. Overlaying simple tax trading heuristics on trading strategies improves out-of-sample performance. For medium to large transaction costs, no trading strategy can outperform a 1/N trading strategy augmented with a tax heuristic, not even the most tax and transaction cost-efficient buy-and-hold strategy. Overall, the best strategy is 1/N augmented with a heuristic that allows for a fixed deviation in absolute portfolio weights. Our results thus show that the best trading strategies balance diversification considerations and tax considerations.

Keywords: Portfolio choice; Capital gain taxation; Limited use of capital losses; Heuristic trading rules (search for similar items in EconPapers)
JEL-codes: G11 H20 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:119:y:2016:i:3:p:611-625

DOI: 10.1016/j.jfineco.2016.01.024

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