wheat from chaff meta analysis as quantitative literature review abstract this paper presents and develops a quantitative method of literature reviewing and evaluating empirical research meta regression analysis or mra economics is theory driven yet we must learn empirically if economics is to advance mra offers a more objective statistical method to summarize our empirical knowledge and to explain the wide study to study variation in economic research mra is used to assess the evidence for ricardian equivalence and its findings are contrasted to those of conventional narrative review furthermore mra establishes a platform from which to distinguish genuine empirical effect from the exploitable specification error that infests applied econometrics

the relation between tax rates and pre tax returns direct evidence from the 1981 and 1986 tax rate reductions abstract this study documents one effect of the theory of implicit taxes providing evidence that a change in the tax rate results in a change in pre tax returns yield spreads of pairs of treasury bills maturing in the last week of december and the first week of january are examined year ends not affected by rate changes show a significant positive yield spread between these pairs of bills reflecting an upward sloping yield curve however for year ends coinciding with the tax rate reductions of 1981 and 1986 there is a significant negative yield spread between these pairs of bills

arbitrage clientele effects and the term structure of interest rates this paper derives a new and intuitive estimation procedure for the term structure under potential tax arbitrage no a priori assumptions regarding the equality of the prices and present values of bonds are made the data are employed to determine whether this equality holds and an appropriate estimator is thereby endogenously derived the suggested estimator is based on the optimizing behavior of an investor in a market with frictions and emerges directly from the solution of the dual of the no arbitrage optimization problem in addition the proposed estimator benefits from being both theoretically sound and straightforward to apply

the mispricing of u s treasury bonds a case study this article documents an apparent pricing anomaly involving 94 percent 30 year treasury bonds during the months of may and june 1986 during this period the price of the 94s rose sharply relative to the prices of other long term treasury bonds and created a potential arbitrage opportunity in addition owners of the 94 bonds were able to borrow at a zero interest rate bypledging their bonds detailed examination reveals that this relative pricing anomaly cannot be attributed to changes in the level or term structure of interest rates or to differences between the bonds with respect to liquidity taxation or duration

constraints on exchange rate flexibility in transition economies a meta regression analysis of exchange rate pass through this article uses meta regression analysis mra to investigate exchange rate pass through to domestic prices highlighting differences between transition and developed economies a total of 23 studies yielded 575 coefficients measuring exchange rate pass through to import prices and consumer prices for 23 developed and 12 transition economies the mra results confirm the finding of many particular analyses that exchange rate pass through is less than complete in addition exchange rate pass through is higher to import prices than to consumer prices and exchange rate pass through is higher in the long run than in the short run regarding transition and developed economies mra suggests that there is no statistically significant difference in exchange rate pass through to import prices yet exchange rate pass through to consumer prices is significantly and substantially higher in transition than in developed economies this finding is consistent with the caution of many monetary authorities in transitio

taxes on tax exempt bonds implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates with implicit tax rates close to 100 using retail trades and above 70 for interdealer trades these implied tax rates can be identified because a portion of secondary market municipal bond trades involves income taxes after valuing the tax payments market discount bonds which carry income tax liabilities trade at yields around 25 basis points higher than com parable municipal bonds not subject to any taxes the high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions the issue of how taxes affect asset prices is an important issue in finance accounting and economics in theoretical models examining the effect of taxes

implicit delivery options and optimal delivery strategies for financial futures contracts abstract futures contract specification usually allow the short position some variation as to when where how much and what is to be delivered in this paper we derive the optimal delivery policy for the treasury bond futures contracts and find that our policy produces profits that are positive and statistically significant this indicates that future prices are too high in that the short position can earn profits by skillfully exercising his delivery options we find the actual delivery policies of market participants depart substantially from the optimal strategy the implications of these findings for futures traders and bond dealers are discussed

exchange rate pass through exchange rate volatility and exchange rate disconnect abstract this paper explores the hypothesis that high volatility of real and nominal exchange rates may be due to the fact that local currency pricing eliminates the pass through from changes in exchange rates to consumer prices exchange rates may be highly volatile because in a sense they have little effect on macroeconomic variables the paper shows the ingredients necessary to construct such an explanation for exchange rate volatility in addition to the presence of local currency pricing we need a incomplete international financial markets b a structure of international pricing and product distribution such that wealth effects of exchange rate changes are minimized and c stochastic deviations from uncovered interest rate parity together it is shown that these elements can produce exchange rate volatility that is much higher than shocks to economic fundamentals and disconnected from the rest of the economy in the sense that the volatility of all other macroeconomic aggregates are of the same order as that of fundamentals

a dynamic global portfolio immunization strategy in the world of multiple interest rate changes a dynamic immunization and minimax theorem man 5 and khang 9 demonstrate that it is possible to immunize a portfolio of default free assets against unexpected interest rate changes so that at the end of the planning period the investor will realize at least the returns expected at pur chase however this immunization strategy is applicable for the case in which the change in unexpected interest rate occurs only once at the instant after the purchase of the asset obviously the case depicted above is not likely to resemble the real world situation in at least two respects first the interest rate change is likely to occur at any time and second the interest rate change is likely to occur many times during the investor s planning period bierwag 4 deals with the case in which the interest rate change may occur many times during the planning period each occurring at the instant after the beginning of each time period and shows that provided the interest rate changes are small the investor can at the end of the planning period realize the returns expected at purchase by constructing the portfolio whose duration at the begin ning of each period is equal to the length of the remaining planning period thus bierwag s 4 immunization theorem is a local theorem bierwag makes a conjecture that the theorem is not likely to hold true globally this paper shows that the strategy of keeping the portfolio duration calcu lated on the basis of the term structure observed at each moment of time equal to the length of the remaining planning period during the entire planning period guarantees at least the returns expected or promised at purchase regardless of when and how many times interest rate changes occur during the planning period and regardless of sizes of change in the interest rate structure thus the theorem proven in the paper is a global theorem in a very general setting as opposed to bierwag s 4 local theorem a corollary is that bierwag s unconditional im munization policy does not immunize unless all changes in the term structure are university of oregon the author expresses thanks to an anonymous referee whose careful reading of the paper resulted in an improvement

duration measures immunization and utility maximization abstract this paper explores the conditions under which a risk averse investor behaves like an immunizer in choosing the maturity structure of a balance sheet the setting is similar to grove s study in that the liabilities are assumed fixed but differs in the assumed evolution of interest rates m a grove on duration and the optimal maturity structure of the balance sheet bell journal of economics and management science 5 1974 696 709 it transpires that the circumstances under which a risk averse investor behave like an immunizer are not as limited as concluded in grove s study the model thus explains the extensive use of immunization by the business community

implied tax rates and the valuation of discount bonds abstract discount bonds afford the investor the opportunity for capital gains if for tax reasons the market is segmented on the demand side investors in lower and lower tax brackets must be attracted when interest rates rise and the supply of discount bonds increases changes in the differential tax on capital gains and interest income also should affect relative demand testing these hypotheses with u s treasury bond data the implied tax rate is found to vary over time in a manner consistent with market segmentation and tax law changes

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association

a new linear programming approach to bond portfolio management a comment an analysis of the dual problem described by ronn 1987 reveals that it provides a powerful and easily interpretable test for the hypothesis of a single class of marginal investors including models of equilibrium based on a representative tax bracket when ronn s empirical tests are interpreted via the dual they lend additional support to his conclusions in providing a strong rejection of the representative tax bracket hypothesis a valid dual lp used to test the hypothesis can be obtained with fewer assumptions than ronn s primal in addition a minor error in ronn s presentation of the dual is corrected

uncertainty and hyperbolic discounting we propose an evolutionary explanation for the pattern of intertemporal preference reversals often ascribed to hyperbolic discounting we take the view that preferences manifested for example in urges cravings and inclinations are the outcome of evolutionary forces and so will induce animals or humans to make survival maximizing choices in typical decision problems we show that if the typical problem involves payoffs whose realization times are uncertain then optimal preferences give rise to relatively patient behavior when the time horizon is long but induce a switch to impatience when the horizon grows short such reversals do not entail dynamic inconsistency in typical decision problems behavior there is optimal however if a decision maker is confronted with a choice for which the realization time uncertainty falls outside the evolutionary norm her preferences may well prompt her to behave inconsistently we argue that if such a choice problem recurs her evolutionarily endowed aability to learn will lead her to make self commitments against these urges this abstract was borrowed from another version of this item

the effect of taxation on immunization rules and duration estimation investments in default free bonds can be insulated from financial loss due to interest rate changes via additive shock by a process known as immunization the literature on this process ignores taxes this manuscript focuses on three issues the first is the development of the tax adjusted immunization process with a comparison to the existing literature the second issue is the microeconomic effect of a shift in only the individual s tax rates on immunization and investment behavior the third issue is the macroeconomic effect of an across the board shift in tax rates on immunization and investment behavior there is general recognition among investors that a portfolio of default free bonds is not entirely riskless the owner of such a portfolio is subject to risk of financial loss due to interest rate changes occurring over the investment holding period to attenuate these financial losses the bond holder can hedge or immunize his investment by adjusting the average duration of the aggregate bond portfdio including reinvested interest and principal payments to equal exactly the remaining length of his investment holding period the bond duration equation utilized in the immunization process depends on the nature of the stochastic process generating the changes in interest rates therefore if an investor is to successfully immunize his portfolio that is earn income at the end of the period no less than the income promised by the market at the beginning of the period the investor must correctly identify the stochastic process and then employ the appropriate duration measure to obtain the average duration of his aggregate bond portfolio since in reality each investor s income is subject to taxes the immunization process should preserve his desired after tax income furthermore not all investors in the united states are subject to the same tax regulations interest and capital gain income earned by institutions with corporate or mutual forms of ownership such as insurance companies and banks are taxed at a common fixed rate however interest and capital gain income earned by trust institutions such as investment funds and trusts are taxed separately with capital gain income taxed at a lower rate than that applied to interest further complicating the tax treatment of investment income is the ability of the investor to amortize or not to amortize any tax liabilities or tax shields arising from purchasing a bond at a discount or a premium because of the variable nature of the united states tax structure several questions arise which are addressed in this paper how are both the immunization process and the duration estimation altered by the presence of different tax rates applied to interest and capital gains income further how are both duration

beyond publication bias abstract this review considers several meta regression and graphical methods that can differentiate genuine empirical effect from publication bias publication selection exists when editors reviewers or researchers have a preference for statistically significant results because all areas of empirical research are susceptible to publication selection any average or tally of significant insignificant studies is likely to be biased and potentially misleading meta regression analysis can see through the murk of random sampling error and selected misspecification bias to identify the underlying statistical structures that characterize genuine empirical effect meta significance testing and precision effect testing pet are offered as a means to identify empirical effect beyond publication bias and are applied to four areas of empirical economics research minimum wage effects union productivity effects price elasticities and tests of the natural rate hypothesis

term structure forecasts of inflation this paper investigates the information in the term structure of interest rates about future inflation using u k data the author finds that at horizons of up to four years the term structure has predictive value for inflation outcomes the term structure could thus provide a guide to the setting of monetary policy copyright 1992 by royal economic society

are negative option prices possible the callable u s treasury bond puzzle market prices for callable treasury bonds often imply negative values for the implicit call option the author considers a variety of possible explanations for these negative values including the treasury s track record in calling bonds optimally tax related effects tax timing options and bond liquidity none of these factors accounts for the negative values although the costs of short selling may explain why these apparent arbitrage opportunities persist over time why these implicit call values become negative in the first place remains a puzzle copyright 1992 by university of chicago press

tax effects in term structure estimation this study is a refinement and an extension of an earlier study by mcculloch of tax effects in the regression equation for term structure estimation this study includes tests for tax effects and heteroskedasticity a reconsideration of the need for an instrumental variable and a search for the capital gains tax rate in addition to the ordinary income tax rate there are two major findings 1 statistically significant taxinduced bias in the non tax adjusted equation and 2 evidence that the capital gains tax is misspecified in the tax adjusted equation it is well known e g see 4 2 pp 727 30 and 25 that the yield curve is an imperfect surrogate for the term structure of interest rates and various methods have been developed to estimate the term structure directly by regressing prices on payments in a sample of default free securities 1 since investors are concerned with the after tax payments on securities it is desirable to incorporate tax effects in term structure estimation mcculloch 22 and schaefer 26 29 have employed different approaches to the tax effect problem mcculloch employed the regression approach and searched for a single tax rate

an international study of tax effects on government bonds it is shown that coupon bonds alone are not sufficient to span time dated claims on ordinary income capital gains and non taxable wealth in an incomplete bond market where the pure dated claims are not spanned by existing bonds marginal rates of substitution between present consumption and pure dated claims on ordinary income capital gains income and non taxable wealth respectively can differ across bondholders however the relative pricing of coupon bonds in each of these countries is shown to be consistent with the tax status of the major non tax exempt holders of government debt

term structure multiplicity and clientele in markets with transactions costs and taxes the authors investigate term structure with realistic transactions costs and taxes its properties are derived from a certain no arbitrage condition via duality theory in convex programming transactions costs imply an infinite multiplicity of term structures a simple example with realistic transactions costs shows that this multiplicity can induce a valuation range of over 277 basis points transactions costs also allow equilibrium without short sale restrictions the authors find the minimum transactions costs that prevent arbitrage in addition the exact conditions for weak clientele in which investors will not buy some bonds and may not sell any that they already hold are established most research on the pricing of riskless bonds hereafter bonds uses a noarbitrage model equilibrium pricing is based on the assumption that there is no buy and hold investment strategy that provides riskless arbitrage profit however most of these studies ignore transactions costs 2 the clientele model hereafter ss developed by stephen schaefer 19 adopts a no arbitrage assumption na equivalent to the existence of a valuation operator this operator is a vector of discount factors known as the term structure ss shows that na implies the existence of a tax bracket specific term structure that ensures that the bonds after tax present values do not exceed their prices ss also shows that in markets with spanning positive term structures consistent with na will not exist for some brackets see his example in subsection iva below investors in such brackets would have arbitrage opportunities to resolve this na violation and make equilibrium feasible ss assumes a prohibition on shorting this implies clientele effects in the usual sense i e investors in some brackets hold some but not all bonds there may be however a bracket in which investors hold positive amounts of all bonds this would be a

do stock markets react to soccer games a meta regression analysis this study applies meta regression analysis to aggregate a sample of 1126 empirical estimates of the stock market reaction to soccer matches collected from 37 primary studies our results indicate

on increasing risk inequality and poverty measures peacocks lyrebirds and exotic options we extend the rothschild and stiglitz 1970 notion of increasing risk to families of random variables and in this way link their approach to the concept of stochastic processes which are increasing in the convex order these processes have been introduced in seminal work by strassen 1965 doob 1968 and kellerer 1972 who showed that such processes have the same marginals as a martingale in fact we demonstrate that their results include the results of rothschild and stiglitz as a special case further we show that it makes sense to look at a larger class of processes which we refer to as lyrebirds we also show how these processes link up with the concept of second order stochastic dominance and are helpful in studying the dynamics of inequality and poverty measures further applications discussed include geometric and hyperbolic discounting exotic derivatives and real options

option pricing with differential interest rates the classic option pricing model is generalized to a more realistic imperfect dynamically incomplete capital market with different interest rates for borrowing and for lending and a return differential between long and short positions in stock it is found that in the absence of arbitrage opportunities the equilibrium price of any contingent claim must lie within an arbitrage band the boundaries of an arbitrage band are computed as solutions to a quasi linear partial differential equation and in generals each end point of such a band depends on both interest rates for borrowing and for lending this in turn implies that the vector of concurrent equilibrium prices of different contingent claims even claims that are written on different underlying assets must lie within a computable arbitrage oval in the price space article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

after tax term structures of real interest rates inferences from the uk linked and non linked gilt markets abstract this study estimates the after tax term structure of real interest rates using the prices of uk linked and non linked gilts over the period from 25 january 1986 until 25 october 1993 the impact of differential taxation and the existence of noise in observed market prices is found to produce a significant impact on the parameter estimation of term structure models when compared to methods such as brown and schaefer brown r schaefer s 1994 journal of financial economics 35 1 42 that did not two major observations can be made regarding the estimates for spot real interest rates firstly the volatility of the short term rate is much lower than that found by brown and schaefer 1994 which provides a better fit with the predictions of the cir single factor model for interest rates secondly consistent with rumsey rumsey j 1993 an impact of the assumptions about taxes on the estimation of the properties of interest rates working paper there appears to be some evidence to suggest that single factor interest rate models produce a better fit to interest rates on an after tax basis than on a before tax basis

tax induced clientele effects in the market for british government securities abstract this paper develops a new methods for measuring tax effects in bond markets and presents empirical results for british government securities the basic idea is to construct a least cost portfolio which for investors in a given tax bracket dominates a given bond a portfolio is said to dominate a bond if it provides cash flows which are at least as great in every period and has a lower price in effect our method calculates an upper bound on the value of a bond to investors in a given tax bracket the results demonstrate i the existence of clientele effects and ii the absence of an effective tax rate

distinguished lecture on economics in government exchange rate regimes is the bipolar view correct the choice of appropriate exchange rate regime which for economies with access to international capital markets increasingly means a move away from the middle ground of pegged but adjustable fixed exchange rates towards the two corner regimes of either flexible exchange rates or a fixed exchange rate supported if necessary by a commitment to give up altogether an independent monetary policy lawrence h summers 2000 p 8

stochastic dominance and expected utility survey and analysis while stochastic dominance has been employed in various forms as early as 1932 it has only been since 1969 1970 that the notion has been developed and extensively employed in the area of economics finance agriculture statistics marketing and operations research in this survey the first second and third order stochastic dominance rules are discussed with an emphasis on the development in the area since the 1980s

models of the yield curve and the curvature of the implied forward rate function abstract we examine several alternative models of the uk gilt yield curve using daily data for the period 12 july 1996 10 february 2010 we select the best models according to two criteria low out of sample errors in pricing bonds and low curvature of the implied forward rate curve function we suggest additions to some of the models that significantly improve their performance some of the new models out perform those typically used by the central banks in particular this paper suggests that the model used by the canadian central bank which both outperforms other models and is particularly easy to estimate is well suited to the uk gilt market

municipal debt and marginal tax rates is there a tax premium in asset prices we study the marginal tax rate incorporated into short term municipal rates using municipal swap market data using an affine model we identify the marginal tax rate and the credit liquidity spread in 1 week tax exempt rates as well as their associated risk premia the marginal tax rate averages 38 0 and is related to stock bond and commodity returns the tax risk premium is negative consistent with the strong countercyclical nature of after tax fixed income cash flows these results demonstrate that tax risk is a systematic asset pricing factor and help resolve the muni bond puzzle

a maxmin policy for bond management a simple immunization problem is formulated as a maxmin optimal control problem and analytically solved by means of dynamic programming the optimal control law namely the immunization policy turns out to be quite different from any duration based immunization policy moreover it is seemingly able to discriminate between favourable and unfavourable changes in the yield curve

tax arbitrage and the existence of equilibrium prices for financial assets in models where both investors and securities are subject to differential taxation there may be no set of prices that rule out infinite gains to trade or tax arbitrage this paper characterizes the joint restrictions on financial asset returns and investors tax schedules that preclude tax arbitrage in the absence of short sale constraints the authors show that if there exists any configuration of marginal tax rates on investors tax schedules that rule out infinite gains to trade then no tax arbitrage prices will exist they also show that the existence of no tax arbitrage prices ensures the existence of equilibrium prices the effects of differential taxation on the equilibrium prices of financial assets have attracted much attention from financial economists in recent years otherwise identical securities that contribute to taxable income to different degrees will in general be valued differently by taxable investors as a result tax considerations have been useful in helping explain the effect of dividend yield on stock returns the effect of coupon levels and term to maturity on bond prices 2 the timing of investors portfolio transactions 3 and the observed capital structures of firms 4 while a rich set of observed behaviors can be better understood by reference to differential taxation there are well known difflculties in dealing with taxes in a general equilibrium setting to clear markets relative prices must reflect the marginal rates of substitution of all agents simultaneously when tax rates differ across investors however this condition can be impossible to achieve to illustrate consider a world of perfect certainty with two assets a tax exempt municipal bond and a taxable government bond to equate marginal rates of substitution the rate of return on the government bond rg must equal that on the municipal rm grossed up by one minus the investor s marginal tax rate ti that is rg rm 1 ti if there are investors in more than one tax bracket this condition will obviously be impossible to satisfy for all of them simultaneously both authors from graduate school of industrial administration carnegie mellon university we wish to thank scott richard steven spear and an anonymous referee for helping us sort through the issues considered here seminar participants at columbia wharton the johnson symposium on asset pricing at the university of wisconsin madison and the 1986 western finance association meeting also provided valuable comments we are also grateful for the financial support provided by the center for public policy research carnegie mellon university all errors are our own responsibility

bond pricing in markets with taxes abstract two types of equilibrium models in bond markets with taxes exist the clientele model by schaefer and the litzenberger rolfo s model this paper reviews the two models in two frameworks utility arguments and no arbitrage arguments both show that schaefer s is more realistic

bond returns liquidity and missing data this paper examines holding period returns to constant duration portfolios of u s govern ment notes and bonds and measures the return premium generated by liquidity differences in bonds the approach compares constant duration portfolios constructed in two distinct ways one using only bonds issued in the most recent treasury auction one using all other bonds comparisons of the resulting series are made meaningful by choosing narrow du ration ranges in the portfolio formation procedure this in turn induces a missing data problem in the created time series parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data it is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments

hyperbolic discounting and the standard model eliciting discount functions abstract experiments on static intertemporal choice find evidence of particularly extreme impatience toward immediate rewards while this is often taken as support for hyperbolic discounting it could also arise because the most likely participants in experiments may be those with the most immediate need for money we conduct a calibration exercise and find that the extreme impatience observed in experiments can be accommodated by a standard exponential discounting model with no discounting and expectation of a small increase in the base consumption level the calibration uses existing estimates of curvature of utility

the decline in idiosyncratic values of us treasury securities abstract unique features and market frictions can lead to idiosyncratic pricing for some us treasury securities this study uses a linear programming lp model to measure aggregate idiosyncratic pricing of t notes and t bonds from 1980 to 2016 we document an average idiosyncratic pricing of 0 11 per 100 par as compared to an average bid ask spread of 0 08 further idiosyncratic pricing declined dramatically from the early 1980s to the 2010s empirical evidence suggests that the 1986 tax reform act increasing issue sizes and improving market liquidity contribute to the decline at the individual security level we identify factors contributing to and mitigating idiosyncratic pricing

a new linear programming approach to bond portfolio management this paper derives and tests a new linear programming lp approach to bond portfolio management the model elicits possible tax clientele effects in the pricing of u s gov ernment coupon bonds and simultaneously derives the optimal tax specific bond portfolio analytically the model derives these results by exploiting for a given tax bracket the price differential of an after tax stream of cash flows it accomplishes this objective by purchasing at the ask price underprieed bonds for the specific tax bracket while sim ultaneously selling at the bid price overpriced bonds the model requires that the net cash flow inclusive of purchased and sold bonds be nonnegative at all future dates the problem s formulation standardizes the position taken in each bond to a maximum of one unit one of the model s appealing features is the parsimonious number of required calcu lations only one lp program need be run per tax bracket in addition to obtaining an optimally chosen tax specific bond portfolio the model also measures the after tax term structure of spot u s government interest rates for both tax exempt and taxable investors finally the superior monthly holding period rates of return on the optimal taxspecific bond portfolio demonstrate an important property ofthe model s output

a reexamination of the value of tax options this article reexamines the value of tax trading when the tax rate on long term realizations is less than that on short term realizations in particular the value of the option to realize long term capital gains and repurchase stock in order to increase one s tax basis and restart the option to realizefuture losses short term is examined empirically our estimate of the incremental value of restarting which is based on the results of simulations of several alternative tax trading policies over a large number of independent return sequences is generally much smaller than that reported by constantinides 1984 the incremental value of restarting is shown to depend critically on the particular pattern of realized returns and the assumed tax treatment of unrealized capital gains at the end of the simulation period the effects of stockprice volatility transaction costs portfolio offset rules and realization cutoff levels on the value of tax trading are also investigated

the critical implicit tax rate and capital structure in a miller world firms are indifferent between debt and equity when the tax rate that isimplicitly used to price a bond is equal to the statutory corporate tax rate in this paper we derive the implicit tax rate that makes a firm marginally indifferent between debt and equity when debt related tax savings are uncertain we analyze the functional relationship between this critical tax rate and the amount of debt issued by a firm and discuss the implications for a firm s optimal capital structure

taxes capital structure and bondholder clienteles despite much recent progress financial theory has yet to explain the connection if any between the u s tax code and many observed characteristics of corporate bonds empirically why is there no single tax rate equating yields on corporate bonds with yields on tax exempt municipal bonds of apparently identical risks and maturities 2 specifically why does the spread in yields between corporate and municipal bonds divided by the yield on corporates a conventional measure of the marginal tax rate on corporates decrease with increasing risk and maturity more generally why are different types of bonds evidently held by clienteles of investors in tax clienteles for corporate bonds are identified in a competitive financial equilibrium under an asymmetric corporate income tax with interest preceding principal state contingent bonds with higher coupon yields are issued by firms with higher pretax cash inflows per dollar of nondebt tax shield purchased by investors in lower tax brackets and implicitly priced at lower marginal tax rates on these bonds all investors earn tax induced surpluses by contrast all other bonds have implicit tax rates typically equal to the corporate rate and yield for many investors no tax induced surpluses we gratefully acknowledge the helpful comments of george constantinides kose john merton miller jim scott marti subrahmanyam and participants in seminars at baruch chicago columbia houston michigan nyu rutgers usc washington wharton the american finance association the western finance association and the johnson symposium on taxes and finance at wisconsin george constantinides was especially helpful 1 the most notable contribution is miller 1977 other recent papers include chen and kim 1979 kim lewellen and mcconnell 1979 deangelo and masulis 1980a 1980b taggart 1980 kim 1982 auerbach and king 1983 and talmor haugen and bornea 1985 black 1971 anticipates an equilibrium with clienteles 2 schaefer 1982a identifies tax induced clienteles of bondholders in the british gilt market van horne 1982 reports that implicit tax rates vary over time as the supply of discount bonds changes additional evidence is cited in trczinka 1982

asian and australian options a common perspective we show that australian options are equivalent to fixed or floating strike asian options and consequently that by studying asian options from the australian perspective and vice versa much can be gained one specific application of this australian approach leads to a natural dimension reduction for the pricing pde of asian options with or without stochastic volatility featuring time independent coefficients another application lies in the improvement of monte carlo schemes where the australian approach results in a path independent method we also show how the milevsky and posner 1998 result on the reciprocal approximation for asian options can be quickly obtained by using the connection to australian options further we present an analytical exact pricing formula for australian options and adapt a result of carr et al 2008 to show that the price of an australian call option is increasing in the volatility and by doing this answering a standing question by moreno and navas 2008

lease valuation when taxable earnings are a scarce resource in this paper we examine leasing as a tax arbitrage instrument analysis of a sample of uk leases presented in this paper suggests that lessors earn large positive npvs our theoretical model seeks to explain these positive npvs in terms of a market price for a scarce resource that we identify as scarce taxable earnings using these prices the model permits a lessor to determine whether the profitability of a proposed set of lease contracts can be improved by writing e different set of contracts that makes better use of the lessor s taxable earnings there may be two reasons why an initial portfolio of contracts may be suboptimal either there may be clienteles or the leasing market may be inefficient subsequently we discuss reasons why the leasing market may be characterized by clienteles and using two different samples of leases we test whether the leasing market is segmented and efficient in this paper we examine leasing as a tax arbitrage instrument with asymmetrical tax positions between lessors and lessees there will be positive net present values npvs to lease transactions see myers dill and bautista 21 analysis of a sample of united kingdom uk leases presented in this paper suggests that lessors earn large positive npvs our theoretical model seeks to explain these positive npvs in terms of a market price for a scarce resource that we identify as scarce taxable earnings there are two implications of our model one for financial intermediaries that act as lessors and the other for financial economists interested in the leasing market the model permits a lessor to determine whether the profitability of a proposed set of lease contracts can be improved upon by writing a different set of contracts that makes better use of the lessor s taxable earnings there may be two reasons why an initial portfolio of contracts that a lessor is about to write may be suboptimal either there may be clienteles because the leasing market

on the measurement of poverty official statistics in the united states and the united kingdom show a rise in poverty between the 1970 s and the 1980 s but scepticism has been expressed with regard to these findings in particular the methods employed in the measurement of poverty have been the subject of criticism this paper re examines three basic issues in measuring poverty the choice of the poverty line the index of poverty and the relation between poverty and inequality one general theme running through the paper is that there is a diversity of judgments which enter the measurement of poverty and that it is necessary to recognize these explicitly in the procedures adopted there is likely to be disagreement about the choice of poverty line affecting both its level and its structure in this situation we may only be able to make comparisons and not to measure differences and the comparisons may lead only to a partial rather than a complete ordering the first section of the paper discusses the stochastic dominance conditions which allow such comparisons illustrating their application by reference to data for the united states the choice of poverty measure has been the subject of an extensive literature and a variety of measures have been proposed in the second section of the paper a different approach is suggested considering a class of measures satisfying certain general properties and seeking conditions under which all members of the class which includes many of those proposed give the same ranking those sceptical about measures of poverty often assert that poverty and inequality are being confounded the third section of the paper distinguishes four different viewpoints and relates them to theories of justice and views of social welfare

when can you immunize a bond portfolio abstract this paper presents a condition equivalent to the existence of a riskless shadow asset that guarantees a minimum return when the asset prices are convex functions of interest rates or other state variables we apply this lemma to immunize default free and option free coupon bonds and reach three main conclusions first we give a solution to an old puzzle why do simple duration matching portfolios work well in empirical studies of immunization even though they are derived in a model inconsistent with equilibrium and shifts on the term structure of interest rates are not parallel as assumed second we establish a clear distinction between the concepts of immunized and maxmin portfolios third we develop a framework that includes the main results of this literature as special cases next we present a new strategy of immunization that consists in matching duration and minimizing a new linear dispersion measure of immunization risk

income fluctuation and asymmetric information an example of a repeated principal agent problem we examine a simple repeated principal agent model with discounting there are a risk averse borrower with an unobservable random income and a risk neutral lender the efficient contract is characterized it tends to the first best constant consumption contract as the discount factor tends to one and the time horizon extends to infinity if the time horizon is infinite and the contract is legally enforceable the borrower s utility becomes arbitrarily negative with probability one if the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference

the determinants of foreign direct investment in transition economies a meta analysis in this paper we conduct a meta analysis of studies that empirically examine the relationship between economic transformation and foreign direct investment fdi performance in central and eastern europe and the former soviet union over the past quarter century more specifically we synthesise the empirical evidence reported in previous studies that deal with the determinants of fdi in transition economies focusing on the impacts of transition factors we also perform meta regression analysis to specify determinant factors of the heterogeneity among the relevant studies and the presence of publication selection bias we find that the existing literature reports a statistically significant non zero effect as a whole and a genuine effect is confirmed for some fdi determinants beyond the publication selection bias

arbitrage pricing transaction costs and taxation of capital gains abstract this paper examines one of the few cases of seemingly redundant securities sets of three government bonds with the same maturity date within the bounds on relative bond prices established by tax exempt investors in a market with proportional transaction costs the taxation of capital gains on the basis of realization has a significant impact on relative prices the empirical evidence supports the tax option effect discussed by constantinides and ingersoll but does not generally support the segmented tax clientele equilibrium discussed by schaefer

stochastic dominance and expected utility while stochastic dominance has been employed in various forms as early as 1932 it has only been since 1969 1970 that the notion has been developed and extensively employed in the area of economics

immunization as a maxmin strategy the purpose of this paper is to broaden the analysis of immunization when it is viewed as amaxmin strategy several results are demonstrated which provide a new interpretation of maxmin strategy by using a more general theory of lagrangians we clarify the exact assumptions required for the duration strategy and the maxmin strategy to be equivalent in a world with taxes it is shown that in a world with taxes the immunization strategy requires the portfolio to satisfy a constraint about the bond to be included in addition to the duration constraint

a multi attribute comparative evaluation of relative risk for a sample of banks abstract this paper proposes a comparative analysis of five different attributes of commercial banks liabilities that may be thought of as either directly measuring the default risk or are perceived by the market as impacting upon that default risk two of these attributes are credit ratings assigned by moody s and standard and poor s to debt issues the third attribute that we consider is yield to maturity which is typically assumed to be positively related to default risk the fourth attribute that is proposed is the fair value risk adjusted deposit insurance premium derived from option theoretic modeling and estimated from the daily data on equity prices finally we propose a term structure adjusted difference in yield between the risky debt and default free government debt as a more precise and theoretically sound measure of the default risk premium and develop a methodology for eliciting it on a composite basis for a given bank from the market prices of its various bond issues this term structure adjusted risk premium provides an analytical approximation to the valuation of corporate bonds call features and sinking fund provisions in view of the ordinality of the credit ratings given by the investment agencies spearman s rank correlation coefficient is employed as an analytical tool the analysis

valuation of risky assets in arbitrage free economies with frictions this paper derives a framework for arbitrage models in markets with frictions it generalizes the existence of a valuation operator to such markets as in perfect markets the valuation operator is a linear operator and its existence is implied by the no arbitrage condition in imperfect markets the valuation operator is individual specific and depends on the agent s position in the market the methodology employed in the paper is duality in convex programming

tax clienteles and optimal capital structure under uncertainty this article demonstrates that investors heterogeneous tax status implies that they value bonds differently at the margin due to asymmetric personal taxes high risk bonds generate a higher amount of taxable income than low risk bonds and are therefore held by investors in low tax brackets in such a setting firms can increase their value by choosing a capital structure that attracts a particular bondholder clientele the author analyzes how bondholder clienteles change as the uncertainty about a bond s final payoff is resolved over time and shows how tax clientele effects influence firms capital structure decisions copyright 1990 by the university of chicago

immunization in markets with tax clientele effects evidence from the canadian market empirical immunization studies have considered the efficacy of immunization strategies in which the durations of assets and of liabilities are equated against a strategy involving maturity matching however all these studies have ignored tax effects in the presence of tax clientele effects immunization requires that the portfolio consists only of bonds that are correctly priced for a particular clientele testing for these effects therefore requires the identification of the correctly priced bonds for the investors in the clientele however since bond prices contain noise determining these bonds is still an unresolved problem consequently an empirical test of the magnitude of the error caused by ignoring taxes may be an impossible task in some markets and indeed has never been conducted the canadian bond market provides perfect laboratory conditions for such a test tax clientele effects are present in the canadian market and among the clienteles is a representative clientele this paper examines the tax effects on immunization strategies the results show that the error caused by ignoring tax effects is not negligible and practitioners should use immunization with reference to tax effects