Kang, Johnny, Pekkala, Tapio, Polk, Christopher and Ribeiro, Ruy (2011) Stock prices under pressure: how tax and interest rates drive returns at the turn of the tax year. FMG discussion paper, 671. Financial Markets Group, London School of Economics and Political Science, London, UK.
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We show that the level of interest rates determines the magnitude of mispricing at the turn of the tax year, as investors face the trade-o¤ between selling a temporarily depressed stock this year and selling next year, but delaying tax implications by one year. Interest rates do explain the predictable variation in US returns and selling behaviour around the turn of the year. Similar results in the UK provide out-of-sample confirmation, as tax and calendar years di¤er. Moreover, part of the variation in the risks and abnormal returns of size, value, and momentum factors can be linked to tax-motivated trading.
|Item Type:||Monograph (Working Paper)|
|Additional Information:||© 2011 Financial Markets Group, London School of Economics and Political Science|
|Uncontrolled Keywords:||tax-loss harvesting, January e¤ect, downward-sloping demand curves|
|Library of Congress subject classification:||H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
|Journal of Economic Literature Classification System:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
|Sets:||Departments > Finance
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