Portfolio Tax Trading with Carryover Losses
Journal article, Peer reviewed
Accepted version
View/ Open
Date
2018Metadata
Show full item recordCollections
- Publikasjoner fra CRIStin - BI [1044]
- Scientific articles [2223]
Abstract
We study portfolio choice with multiple stocks and capital gain taxation assuming that capital losses can only offset current or future realized capital gains. We show, through backtesting using empirical distributions, that optimal equity holdings over an extended period are significantly lower on average than benchmark holdings suggested in the literature. Using Value and Growth or Small and Large portfolios, the backtests show that allocations remain persistently under-diversified. Carry-over losses have large economic significance since they can dramatically shrink the no-trade region. Finally, the backtested economic cost of incorrectly modeling capital losses is at least 8 percent of lifetime wealth.