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An Empirical Evaluation of Tax-Loss Harvesting Alpha by Chaudhuri, Shomesh; Burnham, Terence C.; Lo, Andrew W. is a Economics, Econometrics and Finance article available to read on EtoBox.

What is An Empirical Evaluation of Tax-Loss Harvesting Alpha about?

Advances in financial technology have made tax-loss harvesting strategies potentially more feasible for retail investors. We evaluate the magnitude of this "tax alpha" work using historical data from the Center for Research in Securities Prices monthly database for the 500 securities with the largest market capitalization from 1926 to 2018. We find that a tax-loss harvesting strategy yields a geometric average of 51 basis points per year from 1926 to 2018. However, this tax alpha is highly variable: over four successive 23-year periods, the tax alpha ranged from 26 to 88 basis points per annum, hence investors will need to factor in this variability in their assessment of the tax alpha. Three market factors contribute to these returns: higher volatility, higher dispersion of the individual returns, and lower overall return for the market. Also, although tax alphas are mostly positive, the largest magnitudes occur in years when investors are least likely to be able to make use of them immediately, i.e., when most equity investments are down, in which case their value must be discounted by the impact of having to carry forward those losses.

Who reads An Empirical Evaluation of Tax-Loss Harvesting Alpha?

Author

Chaudhuri, Shomesh; Burnham, Terence C.; Lo, Andrew W.

Publisher

Social Science Electronic Publishing; Publons; Research Square; Elsevier BV (ISSN 1556-5068)

Published

2019

Language

EN

Field

Economics, Econometrics and Finance (Social Sciences)