Optimal trading of a security when there are taxes and transaction costs
The authors consider a financial market in which there is a single stock and its price is modeled by a geometric Brownian motion. There is a single tax rate (no distinction between short and long term capital gains), and the stock pays no dividends. There is an investor, and at each point in time he must have all his money invested in his stock. At any point of time he can sell his stock, but when he does so he pays a transaction cost, he pays a tax if he has a capital gain, he receives a tax credit if he has a loss (this is a standard assumption in the economic literature), and he must take all the remaining money and immediately invest it back in the same stock. The main point of this paper is to show that such transaction is sensible, even if the investor is holding a gain. The special case with the transaction cost rate equals to zero is considered, and authors get explicit formula for the long-run growth rate corresponding to continuous trading.
scientific article; zbMATH DE number 1336680