Optimal Portfolio Choice with Wash Sale Constraints

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

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.
Original languageEnglish
JournalJournal of Economic Dynamics and Control
Volume35
Issue number11
Pages (from-to)1916-1937
ISSN0165-1889
DOIs
Publication statusPublished - 2011

Keywords

  • Wash Sale Restrictions
  • Asset Allocation
  • Portfolio Choice
  • Capital Gains Taxation

Cite this

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title = "Optimal Portfolio Choice with Wash Sale Constraints",
abstract = "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.",
keywords = "Wash Sale Restrictions, Asset Allocation, Portfolio Choice, Capital Gains Taxation",
author = "{Astrup Jensen}, Bjarne and Marcel Marekwica",
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language = "English",
volume = "35",
pages = "1916--1937",
journal = "Journal of Economic Dynamics and Control",
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Optimal Portfolio Choice with Wash Sale Constraints. / Astrup Jensen, Bjarne; Marekwica, Marcel.

In: Journal of Economic Dynamics and Control, Vol. 35, No. 11, 2011, p. 1916-1937.

Research output: Contribution to journalJournal articleResearchpeer-review

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

VL - 35

SP - 1916

EP - 1937

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

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ER -