Journal of Financial Economics Vol. 119 No. 3 2016
Heuristic portfolio trading rules with capital gain taxes
Abstract
We study the out-of-sample performance of portfolio trading strategies used when an investor faces capital gain taxation and proportional transaction costs. Overlaying simple tax trading heuristics on trading strategies improves out-of-sample performance. For medium to large transaction costs, no trading strategy can outperform a 1/N trading strategy augmented with a tax heuristic, not even the most tax and transaction cost-efficient buy-and-hold strategy. Overall, the best strategy is 1/N augmented with a heuristic that allows for a fixed deviation in absolute portfolio weights. Our results thus show that the best trading strategies balance diversification considerations and tax considerations.
- DOI
- 10.1016/j.jfineco.2016.01.024
- Volume
- 119
- Issue
- 3
- Pages
- 611-625
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref