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Term Structure Multiplicity and Clientele in Markets with Transactions Costs and Taxes

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  • Dermody, Jaime Cuevas
  • Prisman, Eliezer Zeev

Abstract

The authors investigate term structure with realistic transactions costs and taxes. Its properties are derived from a certain no- arbitrage condition via duality theory in convex programming. Transac tions costs imply an infinite multiplicity of term structures. A simp le example with realistic transactions costs shows that this multipli city can induce a valuation range of over 277 basis points. Transacti ons costs also allow equilibrium without short-sale restrictions. The authors find the minimum transactions costs that prevent arbitrage. Each investor is shown to have a new type of clientele effect, called a weak long or a weak short clientele effect, for each bond. Copyright 1988 by American Finance Association.

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  • Dermody, Jaime Cuevas & Prisman, Eliezer Zeev, 1988. "Term Structure Multiplicity and Clientele in Markets with Transactions Costs and Taxes," Journal of Finance, American Finance Association, vol. 43(4), pages 893-911, September.
    • Handle: RePEc:bla:jfinan:v:43:y:1988:i:4:p:893-911
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    Citations

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    Cited by:

    1. Stefan Jaschke & Richard Stehle & Stephan Wernicke, 2000. "Arbitrage und die Gültigkeit des Barwertprinzips im Markt für Bundeswertpapiere," Schmalenbach Journal of Business Research, Springer, vol. 52(5), pages 440-468, August.
    2. Ardalan, Kavous, 1999. "The no-arbitrage condition and financial markets with transaction costs and heterogeneous information: The bid-ask spread," Global Finance Journal, Elsevier, vol. 10(1), pages 83-91.
    3. Stehle, Richard & Jaschke, Stefan R. & Wernicke, S., 1998. "Tax clientele effects in the German bond market," SFB 373 Discussion Papers 1998,11, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    4. Chambers, Robert G. & Quiggin, John C., 2002. "Resource Allocation And Asset Pricing," Working Papers 28571, University of Maryland, Department of Agricultural and Resource Economics.
    5. Frank Milne & Edwin H. Neave, 2003. "A General Equilibrium Financial Asset Economy With Transaction Costs And Trading Constraints," Working Paper 1082, Economics Department, Queen's University.
    6. Balbás, Alejandro & López, Susana, 2000. "Envelopes for the term structure of interest rates," DEE - Working Papers. Business Economics. WB 9966, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    7. Bjarne Jensen, 2009. "Valuation before and after tax in the discrete time, finite state no arbitrage model," Annals of Finance, Springer, vol. 5(1), pages 91-123, January.
    8. Ioannides, Michalis, 2003. "A comparison of yield curve estimation techniques using UK data," Journal of Banking & Finance, Elsevier, vol. 27(1), pages 1-26, January.

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