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Tax-Induced lntertemporal Restrictions on Security Returns

Bossaerts, Peter and Dammon, Robert M. (1991) Tax-Induced lntertemporal Restrictions on Security Returns. Social Science Working Paper, 763. California Institute of Technology , Pasadena, CA. (Unpublished)

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This paper derives testable restrictions on equilibrium prices when capital gains and losses are taxed only when realized. We use the Generalized Method of Moments (GMM) procedure to estimate and test the restrictions. The empirical results show evidence of capital gains tax effects on the pricing of common stock. The restrictions are not rejected by the data and estimates of the coefficient of risk aversion and the dividend tax rate are precise and economically plausible. Estimates of the capital gains tax rate, however, are often imprecise and economically implausible. Further results indicate that this can be attributed to the fact that our model does not accommodate differential long and short-term tax rates. The data appear to favor the martingale hypothesis for after-tax asset returns over a before-tax consumption-based asset pricing model.

Item Type:Report or Paper (Working Paper)
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URLURL TypeDescription ItemPublished Version
Bossaerts, Peter0000-0003-2308-2603
Alternate Title:A Consumption Based Asset Pricing Model with Personal Taxes: Theory and Empirical Tests
Additional Information:We are grateful for valuable discussions with Rick Greeu, Steve Heston, Ravi Jagannathan, Bob Miller, Ken Singleton, Chester Spatt, Stan Zin, and the seminar participants at the California Institute of Technology, Carnegie Mellon University, the Stockholm School of Economics, the University of British Columbia, UC-Irvine, UC-Los Angeles, UC-San Diego, the University of Southern California, the University of Utah and the 1990 Western Finance Association Meetings. We gratefully acknowledge the research assistance of Bernt Oedegaard and the financial support provided by a Carnegie Mellon University faculty development grant. The first author also acknowledges the hospitality of the Sloan School of Management of MIT, where part of this paper was written. Previous versions of this paper were circulated under the title "A Consumption Based Asset Pricing Model with Personal Taxes: Theory and Empirical Tests". Published as Bossaerts, Peter, and Robert M. Dammon. "Tax‐Induced Intertemporal Restrictions on Security Returns." The Journal Of Finance 49, no. 4 (1994): 1347-1371.
Group:Social Science Working Papers
Funding AgencyGrant Number
Carnegie Mellon UniversityUNSPECIFIED
Subject Keywords:Taxes, Investors, Capital gains, Tax rates, Estimated taxes, Dividends, Treasury bills, Statistical models, Common stock, Economic models
Series Name:Social Science Working Paper
Issue or Number:763
Record Number:CaltechAUTHORS:20170831-132709679
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81021
Deposited By: Jacquelyn Bussone
Deposited On:31 Aug 2017 20:53
Last Modified:03 Oct 2019 18:37

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