Heuristic portfolio trading rules with capital gain taxes

Abstract

We study the out-of-sample performance of portfolio trading strategies 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.

A comprehensive appraisal of style-integration methods

“…Our article speaks to a recent but quickly growing literature on style-integration in equity markets (Brandt et al, 2009;Frazzini et al, 2013;Fischer and Gallmeyer, 2016;Fitzgibbons et al, 2016;Ghysels et al, 2016;Leippold and Rueegg, 2018;DeMiguel et al, 2019), currency markets (Kroencke et al, 2014;Barroso and Santa-Clara, 2015b) and commodity markets (Fuertes et al, 2015). A common denominator to these studies is their focus on one or at most two style-integration approaches.…”

“…The six sophisticated style-integrations have in common that the style weights are derived from past style return data but they differ in the criteria adopted: utility maximization (Optimized Integration, OI), persistence in riskadjusted performance (Rotation-of-Styles Integration, RSI), volatility (Volatility Timing Integration, VTI), pricing ability (Cross-Sectional Pricing Integration, CSI), factor momentum (Style Momentum Integration, SMI) and principal components analysis (Principal Components Integration, PCI). The EWI, OI and RSI methods have already been employed (e.g., Barberis and Shleifer, 2003;Brandt et al, 2009;Frazzini et al, 2013;Fischer and Gallmeyer, 2016;Fitzgibbons et al, 2016;Ghysels et al, 2016;and DeMiguel et al, 2019), but the VTI, SMI, CSI and PCI methods are new to the style-integration literature, to our best knowledge.…”

“…Moreover, the finding is not challenged in a battery of robustness analyses that entertain variants of the sophisticated style-integrations, different 1 We assume that our representative investor seeks exposure to multiple styles (hereafter, style integration) as opposed to pursuing a single style. This is motivated by recent evidence that establishes the benefits of style-integration for equities (Brandt et al, 2009;Frazzini et al, 2013, Fischer andGallmeyer, 2016;Fitzgibbons et al, 2016), currencies (Kroencke et al, 2014;Barroso and Santa-Clara, 2015b) and commodity futures (Fuertes et al, 2015). 2 As defined by psychologists Amos Tversky and Daniel Kahneman in the early 1970s, when we rely on a representative heuristic, we often wrongly judge that something is more representative than it actually is.…”

The Effect of Accounting Information and Tax Information on Trading Value Moderated by Competitive Strategy

“…With increased stocks, it can affect investors in capital market competition. Based on the research of Fischer and Gallmeyer (2016) explained that the stock trading strategy has a significant effect on tax information such as capital gain taxes. Furthermore, Kuo and Lee (2013) share ownership in controlling shareholders has a significant positive impact on the market reaction in the announcement of tax information.…”

“…Furthermore, there are results of research regarding the relationship of tax information to stock prices. Research conducted by Fischer and Gallmeyer (2016) explains that the stock trading strategy has a significant effect on tax information such as capital gain taxes. According to Wagner, Zeckhauser, and Ziegler (2018) explains that expectations about tax rates greatly affect the value of stock trading.…”