A Model for Tax Advantages of Portfolios with Many Assets

25 Pages Posted: 4 Sep 2005 Last revised: 8 Jan 2015

See all articles by John R. Birge

John R. Birge

University of Chicago - Booth School of Business

S. Alex Yang

London Business School

Date Written: August 1, 2005

Abstract

Taxable portfolios present challenges for optimization models with even a limited number of assets. Holding many assets, however, has a distinct tax advantage over holding few assets. In this paper, we develop a model that takes an extreme view of a portfolio as a continuum of assets to gain the broadest possible advantage from holding many assets. We find the optimal strategy for trading in this portfolio in the absence of transaction costs and develop bounding approximations on the optimal value. We compare the results in a simulation study to a portfolio consisting only of a market index and show that the multi-asset portfolio's tax advantage can lead either to significant consumption or bequest increases.

Keywords: Taxes, portfolio optimization

JEL Classification: C61, G11, H24

Suggested Citation

Birge, John R. and Yang, S. Alex, A Model for Tax Advantages of Portfolios with Many Assets (August 1, 2005). Journal of Banking and Finance, Vol. 31, No. 11, 2007, Available at SSRN: https://ssrn.com/abstract=794144 or http://dx.doi.org/10.2139/ssrn.794144

John R. Birge (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States

S. Alex Yang

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://salexyang.com

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