Tax impact on multi-stage mean-variance portfolio allocation

Tax impact on multi-stage mean-variance portfolio allocation

0.00 Avg rating0 Votes
Article ID: iaor20062153
Country: United Kingdom
Volume: 11
Issue: 5
Start Page Number: 535
End Page Number: 554
Publication Date: Sep 2004
Journal: International Transactions in Operational Research
Authors: , ,
Keywords: programming: probabilistic
Abstract:

We investigate the sensitivity to tax change of multi-stage portfolio allocation over a discrete time investment horizon. Special taxation rules within wrappers grouped a number of risky assets are integrated with multi-stage linear or quadratic stochastic programming in the mean-variance framework. The uncertainty on the returns of assets is specified as a scenario tree generated by a simulation-based approach. We adjust different values on capital gains tax under different asset bounds and risk levels. The tax impact in the yearly reallocation of the investments for a typical case with an annual fixed withdrawal that utilizes completely the option of taper relief is also explored. Our computational results show that taxes, combined with other effects such as risk and investment upper bounds, have a significant performance impact on portfolio allocation as well as diversification over wrappers. Yet, investment strategies can be made robust to changes in taxation.

Reviews

Required fields are marked *. Your email address will not be published.