Optimal trading of a security when there are taxes and transaction costs

Abel Cadenillas () and Stanley R. Pliska ()
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Abel Cadenillas: Department of Mathematical Sciences, University of Alberta, Edmonton, Alberta, Canada T6G 2G1
Stanley R. Pliska: University of Illinois at Chicago, 601 South Morgan Street, Chicago, IL 60607-7124, USA Manuscript

Finance and Stochastics, 1999, vol. 3, issue 2, 137-165

Abstract: We study the problem of investing in securities in order to maximize the after-tax rate of return. We consider a single stock modeled as geometric Brownian motion along with the objective of maximizing the long-run growth rate of after-tax wealth. We show that it is optimal not only to cut short the losses, but also the profits, even though there is no distinction between short and long term tax rates. This surprising result may be due to the possibility of using the tax system to reduce after-tax volatility.

Keywords: Portfolio management; stopping time; stochastic control; taxes; transaction costs (search for similar items in EconPapers)
Date: 1999-01-29
Note: received: June 1997; final version received: February 1998
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Citations: View citations in EconPapers (13)

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