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Erschienen in: Mathematics and Financial Economics 3/2019

11.10.2018

How local in time is the no-arbitrage property under capital gains taxes?

verfasst von: Christoph Kühn

Erschienen in: Mathematics and Financial Economics | Ausgabe 3/2019

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Abstract

In frictionless financial markets, no-arbitrage is a local property in time. This means that a discrete time model is arbitrage-free if and only if there does not exist a one-period-arbitrage. With capital gains taxes, this equivalence fails. For a model with a linear tax and one non-shortable risky stock, we introduce the concept of robust local no-arbitrage (RLNA) as the weakest local condition which guarantees dynamic no-arbitrage. Under a sharp dichotomy condition, we prove (RLNA). Since no-one-period-arbitrage is necessary for no-arbitrage, the latter is sandwiched between two local conditions, which allows us to estimate its non-locality. Furthermore, we construct a stock price process such that two long positions in the same stock hedge each other. This puzzling phenomenon that cannot occur in arbitrage-free frictionless markets (or markets with proportional transaction costs) is used to show that no-arbitrage alone does not imply the existence of an equivalent separating measure if the probability space is infinite. Finally, we show that the model with a linear tax on capital gains can be written as a model with proportional transaction costs by introducing several fictitious securities.

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Metadaten
Titel
How local in time is the no-arbitrage property under capital gains taxes?
verfasst von
Christoph Kühn
Publikationsdatum
11.10.2018
Verlag
Springer Berlin Heidelberg
Erschienen in
Mathematics and Financial Economics / Ausgabe 3/2019
Print ISSN: 1862-9679
Elektronische ISSN: 1862-9660
DOI
https://doi.org/10.1007/s11579-018-0230-7

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