Work

Optimal Consumption and Investment with Capital Gains Taxes

Year: 2001

Type: article

Abstract: This article characterizes optimal dynamic consumption and portfolio decisions in the presence of capital gains taxes and short-sale restrictions. The optimal decisions are a function of the investor's age, initial portfolio holdings, and tax basis. Our results capture the trade-off between the diversification benefits and tax costs of trading over an investor's lifetime. The incentive to rediversify the portfolio is inversely related to the size of the embedded gain and investor's age. Contrary to standard financial advice, the optimal equity holding increases well into an investor's lifetime in our model due to the forgiveness of capital gains taxes at death.

Source: Review of Financial Studies

DOI: 10.1093/rfs/14.3.583

Authors: Robert M. Dammon, Chester S. Spatt, Harold H. Zhang

Institutions: Carnegie Mellon University, University of North Carolina at Chapel Hill

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3124653204

FWCI: 24.98

Cites: 18

Cited by: 249

Related to: 10