Stock prices under pressure; How tax and interest rates drive returns at the turn of the tax year

JOhnny Kang (), Tapio Pekkala (), Christopher Polk and Ruy Ribeiro ()

FMG Discussion Papers from Financial Markets Group

Abstract: We show that the level of interest rates determines the magnitude of mispricing at the turn of the tax year, as investors face the trade-o¤ between selling a temporarily depressed stock this year and selling next year, but delaying tax implications by one year. Interest rates do explain the predictable variation in US returns and selling behaviour around the turn of the year. Similar results in the UK provide out-of-sample confirmation, as tax and calendar years di¤er. Moreover, part of the variation in the risks and abnormal returns of size, value, and momentum factors can be linked to tax-motivated trading.

Date: 2011-02
New Economics Papers: this item is included in nep-acc, nep-fmk and nep-pbe
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Working Paper: Stock prices under pressure: how tax and interest rates drive returns at the turn of the tax year (2011)
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