Taxes and Risk in Financial Markets: A Separation Result

Evidence of Implicit Taxes on Equity Using Data from Futures Markets to Control for Risk

“…We can interpret r f as the risk premium on the stock. It is easy to demonstrate (see Williams, 2001c) that the choice of N (and implicitly F) is completely separable from the choice of B and E; that is, optimizing risk and optimizing risk-free returns are independent decisions. Therefore, we can and will ignore the choice of N in subsequent analysis.…”