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TAX‐LOSS TRADING, IS THE GAME OVER OR HAVE THE RULES CHANGED?

TAX‐LOSS TRADING, IS THE GAME OVER OR HAVE THE RULES CHANGED? The Financial R v e eiw prevents arbitragers from eliminating the pattern. Givoly and Ovadia [14] also found generally high January returns which seemed to be associated with tax selling in the preceding December. Moreover the effect was most pronounced among small firms. They speculated that “window dressing” by institutional investors may account for at least part of the December declines. Constantinides [ 111 formulated a logical trading strategy for individual investors who are subject to the U.S. personal income tax system. According to his analysis, investors should seek to realize long-term gains in high variance stocks. They should use the proceeds to purchase other stocks some of which will generate losses. Such losses should be realized before they become long-term. Constantinides’ theoretical work and simulations explain the January effect only if investors are irrational or ignorant of the market’s seasonal pattern. Finally a series of studies have examined a number of other countries’ stock markets and generally found seasonal price patterns there [3, 4, 7, 161. RELATION TO MARKET EFFICIENCY An efficient market clears at prices which accurately reflect the relevant available information. No one operating in such a market should consistently be able to earn returns http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Financial Review Wiley

TAX‐LOSS TRADING, IS THE GAME OVER OR HAVE THE RULES CHANGED?

Branch, Ben; Chang, Kyungchun
The Financial Review , Volume 20 (1) – Feb 1, 1985
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References (14)

Publisher
Wiley
Copyright
Copyright © 1985 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0732-8516
eISSN
1540-6288
DOI
10.1111/j.1540-6288.1985.tb00164.x
Publisher site
See Article on Publisher Site

Abstract

The Financial R v e eiw prevents arbitragers from eliminating the pattern. Givoly and Ovadia [14] also found generally high January returns which seemed to be associated with tax selling in the preceding December. Moreover the effect was most pronounced among small firms. They speculated that “window dressing” by institutional investors may account for at least part of the December declines. Constantinides [ 111 formulated a logical trading strategy for individual investors who are subject to the U.S. personal income tax system. According to his analysis, investors should seek to realize long-term gains in high variance stocks. They should use the proceeds to purchase other stocks some of which will generate losses. Such losses should be realized before they become long-term. Constantinides’ theoretical work and simulations explain the January effect only if investors are irrational or ignorant of the market’s seasonal pattern. Finally a series of studies have examined a number of other countries’ stock markets and generally found seasonal price patterns there [3, 4, 7, 161. RELATION TO MARKET EFFICIENCY An efficient market clears at prices which accurately reflect the relevant available information. No one operating in such a market should consistently be able to earn returns

Journal

The Financial Review – Wiley

Published: Feb 1, 1985

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