A general framework for multistage mean-variance post-tax optimization
- 96 Downloads
An investor’s decisions affect the way taxes are paid in a general portfolio investment, modifying the net redemption value and the yearly optimal portfolio distribution. We investigate the role of these decisions on multistage mean-variance portfolio allocation model. A number of risky assets grouped in wrappers with special taxation rules is integrated in a multistage financial portfolio optimization problem. The uncertainty on the returns of assets is specified as a scenario tree generated by simulation/clustering based approach. We show the impact of decisions in the yearly reallocation of the investments for three typical cases with an annual fixed withdrawal in a fixed horizon that utilizes completely the option of taper relief offered by banks in UK. Our computational framework can be used as a tool for testing decisions in this context.
KeywordsPost-tax optimization Mean-variance portfolio management Multistage stochastic mixed-integer quadratic programming Scenario tree
Unable to display preview. Download preview PDF.
- Asea, P., & Turnovsky, S. (1997). Capital income taxation and risk-taking in a small open economy. Department of Economics, University of California, Los Angeles Working Paper 768. Google Scholar
- Birge, J. R., & Louveaux, F. V. (1997). Introduction to stochastic programming. New York: Springer. Google Scholar
- Kall, P., & Wallace, S. W. (1994). Stochastic programming. New York: Wiley. Google Scholar
- Gulpinar, N., Rustem, B., & Settergren, R. (2003). Multistage stochastic mean-variance portfolio analysis with transaction cost. Innovations in Financial and Economic Networks, 3, 46–63. Google Scholar
- Kallberg, J. G., & Ziemba, W. T. (1983). Comparison of alternative utility functions in portfolio selection problems. Management Science, 29(11), 1257–1276. Google Scholar
- Mészáros, C. (1997). BPMPD user’s manual version 2.20. Department of Computing Research Report #97/8, July 1997. Google Scholar
- Osorio, M. A., Settergren, R., Rustem, B., & Gulpinar, N. (2002). Post tax optimal investments. In Financial engineering, e-commerce and supply chain (pp. 153–173). Dordrecht: Kluwer Academic. Google Scholar
- Prekopa, A. (1995). Stochastic programming. Budapest: Akademiai Kiado. Google Scholar
- Stein, D. (1998). Measuring and evaluating portfolio performance after taxes. The Journal of Portfolio Management, 25(2), 117–124. Google Scholar