Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing

Dammon, Robert M.; Zhang, Harold H.; Spatt, Chester S.

doi:10.2139/ssrn.281681

Cited by 98 publications

(113 citation statements)

References 16 publications

Supporting

Mentioning

108

Contrasting

Order By: Relevance

“…In his numerical study, stocks tend to have their preferred location in the taxable account to use potential benefits from tax-timing and exploit the higher tax-burden of bonds. This result does not differ from that in Dammon, Spatt, and Zhang (2004), whose analysis contains only one risky asset.…”

Section: Prior Studiesmentioning

confidence: 42%

“…In particular, it explains why the equity exposure in both taxable as well as retirement wealth decreases with a decreasing investment horizon. It is most closely related to the recent literature on optimal asset location decisions including Shoven and Sialm (1998), Shoven and Sialm (2003), Dammon, Spatt, and Zhang (2004), Poterba, Shoven, and Sialm (2004), Huang (2006) and Garlappi and Huang (2006). These papers conclude that assets facing a high tax-burden should generally be located in retirement accounts, while assets facing a low tax-burden are better located in conventional taxable accounts.…”

Section: Introductionmentioning

confidence: 80%

“…This argument seems to be very convincing at first sight and has been shown to be correct for investors that are not facing short-selling restrictions (see e.g. Dammon, Spatt, and Zhang (2004), Shoven and Sialm (2003) or the theoretical paper of Huang (2006)). …”

Section: Prior Studiesmentioning

confidence: 86%

“…Hence, the dollar in the RA is worth more than the dollar in the TA, a fact which has been pointed out by Dammon, Spatt, and Zhang (2004) and Poterba (2004). Dammon, Spatt, and Zhang (2004) call the difference between the value of the dollar in the TEA and the value of the dollar in the TA the "shadow price" of that dollar. This "shadow price" depends on the relative dividend of the assets, the relative capital gains of the assets, the level of tax-rates on these dividends and gains, and the length of the remaining investment horizon.…”

Section: Prior Studiesmentioning

confidence: 99%

See 3 more Smart Citations

How unobservable bond positions in retirement accounts affect asset allocation

Marekwica

Maurer

2009

OR Spectrum

View full text Add to dashboard Cite

Many tax-codes around the world allow for special taxable treatment of savings in retirement accounts. In particular, profits in retirement accounts are usually tax exempt which allow investors to increase an asset's return by holding it in such a retirement account. While the existing literature on asset location shows that risk-free bonds are usually the preferred asset to hold in a retirement account, we explain how the tax exemption of profits in retirement accounts affects private investors' asset allocation. We show that total final wealth can be decomposed into what the investor would have earned in a taxable account and what is due to the tax exemption of profits in the retirement account. The tax exemption of profits can thus be considered a tax-gift which is similar to an implicit bond holding. As this tax-gift's impact on total final wealth decreases over time, so does the investor's equity exposure. JEL Classification Codes: G11, H24

show abstract

Section: Prior Studiesmentioning

confidence: 42%

Section: Introductionmentioning

confidence: 80%

Section: Prior Studiesmentioning

confidence: 86%

Section: Prior Studiesmentioning

confidence: 99%

See 2 more Smart Citations

How unobservable bond positions in retirement accounts affect asset allocation

Marekwica

Maurer

2009

OR Spectrum

View full text Add to dashboard Cite

show abstract

“…Usually in the literature the range of γ is between 3 (e.g. Dammon, Spatt, and Zhang (2004)) and 10 (e.g. Cocco, Gomes, and Maenhout (2005)).…”

Section: Parameters Of the Householdsmentioning

confidence: 99%

Intergenerational effects of guaranteed pension contracts

Døskeland

Nordahl

2007

Geneva Risk Insur Rev

View full text Add to dashboard Cite

In this paper we show that there exist an intergenerational cross-subsidization effect in guaranteed interest rate life and pension contracts as the different generations partially share the same reserves. Early generations build up bonus reserves, which are left with the company at expiry of the contract. These bonus reserves function partly as a subsidy of later generations, such that the latter earn a risk-adjusted return above the risk-free rate. Furthermore, we show that this subsidy may be large enough to explain why late generations buy guaranteed interest rate products, which otherwise would not have been part of the optimal portfolio allocation.

show abstract

Taxation and Transaction Costs in a General Equilibrium Asset Economy

Jin

Milne

2007

Applied and Numerical Harmonic Analysis

View full text Add to dashboard Cite

Summary. Most financial asset pricing models assume frictionless, competitive markets that imply the absence of arbitrage opportunities. Given the absence of arbitrage opportunities and complete asset markets, there exists a unique martingale measure that implies martingale pricing formulae and replicating asset portfolios. In incomplete markets, or markets with transaction costs, these results must be modified to admit non-unique measures and the possibility of imperfectly replicating portfolios. Similar difficulties arise in markets with taxation. Some theoretical research has argued that some taxation functions will imply arbitrage opportunities and the non-existence of a competitive asset economy. In this paper we construct a multi-period, discrete time/state general equilibrium model of asset markets with transaction costs and taxes. The transaction cost technology and the tax system are quite general, so that we can include most discrete time/state models with transaction costs and taxation. We show that a competitive equilibrium exists. Our results require careful modeling of the government budget constraints to rule out tax arbitrage possibilities.

show abstract

Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing

Cited by 98 publications

References 16 publications

How unobservable bond positions in retirement accounts affect asset allocation

How unobservable bond positions in retirement accounts affect asset allocation

Intergenerational effects of guaranteed pension contracts

Taxation and Transaction Costs in a General Equilibrium Asset Economy

Contact Info

Product

Resources

About