Capital Income Taxation and Risk-Taking under Prospect Theory: The Continuous Distribution Case
Journal Title: Finance a uver - Year 2014, Vol 64, Issue 5
Abstract
This study verifies whether the results of proportional capital income taxation on the risk-taking of a loss-averse investor will still hold when the return of a risky asset has a general continuous distribution. We extend the previous literature, which assumes a binomial distribution of asset returns for a risky asset. We also show that under reasonable assumptions risk-taking is finite and positive and thus a loss-averse investor will not choose infinite leverage despite no regulations being applied. In addition, unlike in the expected utility model, the capital income tax increase does not stimulate risk-taking when the reference level is the initial wealth or the gross after the tax return from investing the initial wealth into the risk-free asset. Furthermore, when investors set their reference level at the gross (pre-tax) return from investing the initial wealth into the risk-free asset, they increase not only risk-taking but also their private risks as measured by the standard deviation of their after-tax final wealth, which is not the case in the expected utility model.
Authors and Affiliations
Jaroslava Hlouskova, Jana Mikocziova, Rudolf Sivak, Peter Tsigaris
Keywords
Related Articles
- EP ID EP297476
- DOI -
- Views 165
- Downloads 0
US Dollar Carry Trades in the Era of “Cheap Money”
In this paper, we employ a unique dataset of actual US dollar (USD) forward positions against a number of currencies taken by so-called commodity trading advisors (CTAs). We investigate the extent to which these position...
Interest Rate and Exchange Rate Forecasting in the Czech Republic: Do Analysts Know Better than a Random Walk?
The Czech National Bank (CNB) conducts a monthly survey to collect domestic and foreign analysts’ forecasts of several economic and financial variables. Among these are the 2-week repo rate (which is the monetary policy...
Capital Income Taxation and Risk-Taking under Prospect Theory: The Continuous Distribution Case
This study verifies whether the results of proportional capital income taxation on the risk-taking of a loss-averse investor will still hold when the return of a risky asset has a general continuous distribution. We exte...
Real and Financial Sector Studies in Central and Eastern Europe: A Review
This survey focuses broadly on real and financial sector studies in former transition economies of Central and Eastern Europe. The survey shows that in the real sector there has been considerable trade and global integra...
Effects of Price Shocks on Consumer Demand: Estimating the QUAIDS Demand System on Czech Household Budget Survey Data
The purpose of this paper is to provide estimates of price and income elasticities of Czech consumer demand, which can be used when analyzing the impact of exogenous price changes on consumer behavior. We estimate a dema...