TY - JOUR
T1 - Optimal Portfolio Choice with Wash Sale Constraints
AU - Astrup Jensen, Bjarne
AU - Marekwica, Marcel
PY - 2011
Y1 - 2011
N2 - We analytically solve the portfolio choice problem in the presence of wash sale constraints in a two-period model with one risky asset. Our results show that wash sale constraints can heavily affect portfolio choice of investors with unrealized losses. The trading behavior of such investors is to a large extent driven by the desire to realize those losses, either immediately by sharply decreasing the holding of assets carrying unrealized losses, or indirectly by increasing such holdings in order to prepare for a decrease in a future period to earn the tax rebate payment. Our findings are robust to increasing the number of trading dates and introducing a second risky asset and a correlation structure.
AB - We analytically solve the portfolio choice problem in the presence of wash sale constraints in a two-period model with one risky asset. Our results show that wash sale constraints can heavily affect portfolio choice of investors with unrealized losses. The trading behavior of such investors is to a large extent driven by the desire to realize those losses, either immediately by sharply decreasing the holding of assets carrying unrealized losses, or indirectly by increasing such holdings in order to prepare for a decrease in a future period to earn the tax rebate payment. Our findings are robust to increasing the number of trading dates and introducing a second risky asset and a correlation structure.
KW - Wash Sale Restrictions
KW - Asset Allocation
KW - Portfolio Choice
KW - Capital Gains Taxation
U2 - 10.1016/j.jedc.2011.06.007
DO - 10.1016/j.jedc.2011.06.007
M3 - Journal article
SN - 0165-1889
VL - 35
SP - 1916
EP - 1937
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
IS - 11
ER -