Tests for tax-clientele and tax-option effects in U.S. treasury bonds

In markets with taxes the deviations of the price of a bond from its present value may be due to tax clientele and tax option effects. Detecting these effects is complicated by noise in bond prices. Previous empirical research has lacked a theory of how tax effects will influence the deviations in t...

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Bibliographic Details
Published in:Journal of banking & finance 1995-09, Vol.19 (6), p.1055-1072
Main Authors: Ehrhardt, Michael C., Jordan, James V., Prisman, Eliezer Z.
Format: Article
Language:English
Subjects:
Arbitrage
Arbitrage pricing
Bond markets
Bond pricing
Economic theory
Government bonds
Market prices
Studies
Tax clientele
Tax option
Taxation
Term structure
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Summary:In markets with taxes the deviations of the price of a bond from its present value may be due to tax clientele and tax option effects. Detecting these effects is complicated by noise in bond prices. Previous empirical research has lacked a theory of how tax effects will influence the deviations in the presence of noise. This paper develops such a theory and demonstrates a methodology for detecting tax effects. In empirical tests the tax option effect comes through most clearly, but the existence of tax clienteles cannot be ruled out.
ISSN:0378-4266
1872-6372
DOI:10.1016/0378-4266(94)00070-J