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Optimal investment with deferred capital gains taxes

A simple martingale method approach

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Abstract

We solve the optimal portfolio problem of an investor in a complete market who is liable to deferred taxes due on capital gains, irrespective of their origin. In a Brownian framework we explicitly determine optimal strategies. Our analysis is based on a modification of the standard martingale method applied to the after-tax utility function, which exhibits a kink at the level of initial wealth, and Clark’s formula. Numerical results show that the Merton strategy is close to optimal under taxation.

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Authors and Affiliations

  1. Department of Mathematics, University of Kaiserslautern, Erwin-Schrödinger-Straße, 67663, Kaiserslautern, Germany

    Frank Thomas Seifried

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  1. Frank Thomas Seifried
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Correspondence to Frank Thomas Seifried.

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Seifried, F.T. Optimal investment with deferred capital gains taxes. Math Meth Oper Res 71, 181–199 (2010). https://doi.org/10.1007/s00186-009-0291-8

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  • DOI: https://doi.org/10.1007/s00186-009-0291-8

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