SEAS Event Calendar

Friday, October 9, 2009
Public Access

3:00pm
8:00am
9:00am
10:00am
11:00am
12:00pm
1:00pm
2:00pm	[2:00pm-3:15pm] SIE Colloquium [3:00pm-6:00pm] SAIC Sustainable Energy Future - Speaker Series
4:00pm
5:00pm

Description:: SIE Colloquium - Michael Gallmeyer - Friday, October 9th, OLS 005

All faculty members and graduate students are invited.

Systems and Information Engineering Colloquium

Friday October 9th, 2009

2:00 ? 3:15 pm

Olsson 005

Michael Gallmeyer, UVA Associate Professor of Commerce

Portfolio Choice with Capital Gain Taxation and the Limited Use of Losses

We study an investor's consumption-savings problem with realized capital gain taxation. The distinguishing feature of our analysis is that we impose an important element of the tax code that has received little attention in the academic literature: the limited use of capital losses. Existing capital gain tax portfolio choice work assumes the full use of capital losses (FUL) implying unused capital losses generate tax rebates. We show that this common assumption leads to counterfactual welfare results. Due to tax rebates generated from tax loss selling, an untaxed investor would actually prefer to pay a capital gain tax. Instead, when only the limited use of capital losses (LUL) is allowed for, which is consistent with the U.S. tax code, an investor's optimal equity-to-wealth ratio is shown to be strongly non-monotonic in the portfolio's tax basis. For a tax basis significantly below the current stock price, LUL investors with no unrealized capital losses trade equity similar to FUL investors as the probability of tax loss selling in the future is small. For a tax basis close to the current stock price, LUL investors hold significantly less equity relative to FUL investors and untaxed investors. When LUL investors have large unused capital losses or a tax basis significantly above the current stock price, they trade as if they are not taxed on capital gains because they can use accumulated capital losses to offset any future taxes. This difference in trading strategies and the usage of capital losses leads to lower lifetime wealth and equity holdings for LUL investors relative to FUL investors and untaxed investors.

Biography

Professor Gallmeyer specializes in studying how market imperfections influence security prices and trade. His current research focuses on taxation, trading constraints, liquidity, and monetary policy. Before joining the McIntire faculty, Professor Gallmeyer was on the faculty at the Mays Business School at Texas A&M University and the Tepper School of Business at Carnegie Mellon University. He has published in leading academic journals such as Journal of Financial Economics; Journal of Monetary Economics; Review of Finance; Mathematical Finance; and Journal of Economic Dynamics and Control. He has also presented his research at numerous universities and conferences. Professor Gallmeyer serves as an associate editor for Mathematics and Financial Economics.

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