optimal portfolio selection under institutional procedures for short selling abstract this study presents and formally justifies a simple ranking approach for optimal portfolio selection under institutional procedures for short selling it also provides economic insights of the explicit solution of the portfolio problem the analysis is applicable to different treatments of the short sale proceeds and any margin deposits in contrast to previous approaches it does not require assumptions that overstate short sale benefits for maintaining analytical tractability and it can easily identify and filter out securities that are undesirable for investing or for short selling thus this study can enhance the usefulness of portfolio modeling for assisting practical investment decisions

effects of capital gains taxation on life cycle investment and portfolio management we examine the impact of capital income taxation both accrual forms of taxation and taxation of realized capital gains on total savings and the demand for corporate financial instruments we find that investors may hold both debt and equity in the face of effective collection of capital gains taxation even in a flat tax system we also find that the two taxes will have substantially different effects on saving and consumption behavior making it unlikely that the tax structure can be summarized by any single equivalent accrual tax rate this paper examines the impact of income taxation on the demand for various corporate financial instruments focusing on unique features due to taxation of realized capital gains we take a life cycle view of investment behavior and examine how accrual and realization taxation jointly affect an individual s allocation of intertemporal resources we shall consider the impact on his demand for debt and equity showing that taxation of realized capital gains generates an intrapersonal tax clientele effect at any one point of time an individual will strictly prefer either to buy debt or equity but that choice may be different at different ages therefore many individuals will simultaneously hold both debt and equity we also find that any attempt to measure the effective capital gains tax rate will be difficult and that existing approaches appear flawed since they do not correspond to the pattern of distortions which we find in this explicit model of asset demand and saving this analysis deviates from earlier work on capital gains taxation in several substantial dimensions whereas much of the capital gains taxation literature focuses on how capital gains tax regulations generate arbitrage opportunities in perfect capital markets the analysis used below essentially assumes effective enforcement of the intent of capital gains taxation this is desirable since contrary to the perfect capital market implication capital gains tax revenues are nontrivial therefore in examining the nature of asset demand and choice it is reasonable to assume somewhat effective collection of the capital gains tax liabilities our analysis will assume completely effective enforcement to highlight the impact of capital gains taxation it will be clear that several types of leakages will not substantially alter the qualitative conclusions

voluntary leadership in an experimental trust game abstract we present a lab experiment on an endogenous trust game in which one player the principal may decide to leave the investment choice to the agent or to take the investment decision himself herself in the latter case we refer to this as voluntary leadership we show that voluntary leadership increases investment and increases backtransfer of the second mover compared to the alternative sequencing in which the agent is investor we also show that investment and backtransfer are higher under voluntary leadership than in the control treatment with exogenously determined sequencing furthermore we show that risk preference and inequality aversion as modeled formally by fehr and schmidt 1999 influence behavior in the endogenous trust game

special repo rates this article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements a repo rate is in effect an interest rate on loans collateralized by a specific instrument a special is a repo rate significantly below prevailing market riskless interest rates this article shows that specials can occur when those owning the collateral are inhibited whether from legal or institutional requirements or from frictional costs from supplying collateral into repurchase agreements specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials this article characterizes competitive repurchase or repo markets and the equilibrium relationship between repo rates and the underlying cash market prices repurchase markets are often called financing markets since they are effectively vehicles for collateralized borrowing that are often used to finance the purchase of the underlying collateral this article provides causes and effects of specials meaning specific repo rates significantly below prevailing market interest rates for loans of similar maturity and credit risk the example of united states treasury instruments is emphasized because of the extensive use of the treasury repo market as a means of hedging against or speculating on changes in u s interest rates and because of the high incidence of specials in treasury repo rates numerous specific instru

optimal stock trading with personal taxes implications for prices and the abnormal january returns abstract the tax law confers upon the investor a timing option to realize capital losses and defer capital gains with the tax rate on long term gains and losses being about half the short term rate the law provides a second timing option to realize losses short term and gains long term if at all our theory and simulation over the 1962 1977 period establish that taxable investors should realize long term gains in high variance stocks and repurchase stock in order to realize potential future losses short term tax trading does not explain the small firm anomaly but predicts a seasonal pattern in trading volume which maps into a seasonal pattern in stock prices the january anomaly only if investors are irrational or ignorant of the price seasonality

how burdensome are capital gains taxes abstract this paper uses capital gain realization data from individual tax returns to evaluate recent claims that sophisticated portfolio strategies permit investors to avoid capital gains taxes the results suggest important investor heterogeneity twenty percent of taxpayers with capital gains or losses face binding loss offset constraints another significant group of investors evades the capital gains tax prior to recent legislative changes forty percent of capital gains were unreported finally about forty percent of capital gains accrue to investors who report capital gains and face significant tax burdens as the traditional analysis of the capital gains tax suggests

endogenous stackelberg leadership abstract we consider a linear quantity setting duopoly game and analyze which of the players will commit when both players have the possibility to do so to that end we study a two stage game in which each player can either commit to a quantity in stage 1 or wait till stage 2 we show that committing is more risky for the high cost firm and that consequently risk dominance considerations as in harsanyi and selten 1988 allow the conclusion that only the low cost firm will choose to commit hence the low cost firm will emerge as the endogenous stackelberg leader journal of economic literature classification numbers c72 d43

endogenous price leadership a theoretical and experimental analysis we present a model of price leadership on homogeneous product markets where the price leader is selected endogenously the price leader sets and guarantees a sales price to which followers can adjust according to their individual supply functions the price leader then clears the market by serving the residual demand firms with different marginal costs would induce different prices if they were price leaders somewhat counter intuitively lower marginal costs of the leader imply higher prices we compare two mechanisms to determine the price leader in a between subjects design majority voting and competitive bidding the experimental data of later rounds support our theoretical finding that experienced price leaders with lower marginal costs choose higher prices in the majority voting treatment participants with higher marginal costs more often establish the lowest cost competitor as price leader in order to induce a higher sales price

endogenous price leadership we consider a linear price setting duopoly game with differentiated products and determine endogenously which of the players will lead and which one will follow while the follower role is most attractive for each firm we show that waiting is more risky for the low cost firm so that consequently risk dominance considerations as in harsanyi and selten a general theory of equilibrium selection in games mit press cambridge ma 1988 allow the conclusion that only the high cost firm will choose to wait hence the low cost firm will emerge as the endogenous price leader

the effect of entrepreneurial rhetoric on microlending investment an examination of the warm glow effect microlending provides a valuable alternative to traditional financing for entrepreneurs in impoverished countries drawing from theory on political rhetoric and the concept of warm glow giving we examine characteristics of entrepreneurial narratives that are related to how quickly entrepreneurs receive funding using a sample of 6051 narratives from entrepreneurs in developing countries we demonstrate that narratives higher in language indicating blame and present concern lead to more rapid funding while narratives higher in accomplishment tenacity and variety lead to slower funding our findings suggest that the presentation of investment profiles should be carefully managed to maximize funding likelihood

arbitrage and martingales with taxation this paper extends the martingale analysis of no arbitrage pricing to worlds with taxation the absence of arbitrage is shown to imply the existence of different shadow prices for income streams that are subject to differing tax treatments for example no arbitrage implies the existence of different martingale measures for capita l gains and for ordinary income when they are differentially taxed andfor item s such as depreciation expenses that influence only after tax cash flows the analysis is applied to several topics in finance including the debt equity decision tax options and the taxation of dividends and pensions copyright 1987 by university of chicago press

capital asset prices with and without negative holdings prize lecture to the memory of alfred nobel december 7 1990 this abstract was borrowed from another version of this item

short interest explanations and tests cross sectional and time series tests are performed to explain levels and changes in short interest explanatory variables and tests are chosen based on tax arbitrage and speculative reasons for going short short interest is found to follow a seasonal pattern that is weakly consistent with tax based trading stocks with high betas and the existence of convertible securities or options tend to have higher levels of short interest which is con sistent with arbitrage efforts for firms with traded options there is a positive association between the month to month changes in option open interest and short interest prior months returns and changes in short interest are positively related but there is no rela tionship between changes in short interest and returns in the subsequent month

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

distinguishing trust from risk an anatomy of the investment game the role of trust in promoting economic activity and societal development has received considerable academic attention by social scientists a popular way to measure trust at the individual level is the so called investment game berg dickhaut and mccabe 1995 it has been widely noted however that risk attitudes can also affect decisions in this game and thus in principle confound inferences about trust we provide novel evidence shedding light on the role of risk attitudes for trusting decisions to the best of our knowledge our data are the first rigorous evidence that i aggregate investment distributions differ significantly between trust and risk environments and ii risk attitudes predict individual investment decisions in risk games but not in the corresponding trust games our results are convergent evidence that trust decisions are not tightly connected to a person s risk attitudes and they lend support to the trust interpretation of decisions in investment games

the optimal trading and pricing of securities with asymmetric capital gains taxes and transaction costs this article explores the optimal trading and pricing of taxable securities with asymmetric capital gains taxes and transaction costs in the long term region investors realize all gains below some critical cutoff level which we derive analytically in the short term region investors defer all gains and depending upon the time remaining in the short term region may also defer small losses contrary to common intuition deferral of short term losses can be optimal even without transaction costs the value of tax timing is considerably bigger under the optimal trading strategy than under alternative strategies previously analyzed the impact of offset rules is also explored article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the capital gain lock in effect and perfect substitutes abstract this paper analyses the effect of investors accrued capital gains on optimal portfolio composition and equilibrium returns under the assumption that investors are able to re balance with perfect substitute securities no dominance arguments are used to show that pricing differences because of accrued capital gains do not arise among securities which are perfect substitutes these arguments are insufficient however to prevent pricing differences because of accrued capital gains among securities which are not perfect substitutes trading rules are developed which outline the conditions necessary for the realisation of accrued capital gains and the deferral of capital losses these trading rules also provide guidance on which securities investors should sell given their tax basis when re balancing their portfolios