Working Paper: CEPR ID: DP7767
Authors: Kristian Rydqvist
Abstract: Swedish lottery bonds are valuable tax shelters before the tax reform of 1991. By trading around the coupon lottery, high-tax investors with capital gains from the stock market shift their tax liability to low-tax investors. The uncertainty of the coupon lottery and the effort ofverifying the winning lottery bond numbers are a nuisance to tax traders. We investigate how the Treasury (issuer), market makers (banks), and lottery bond investors respond to those frictions.
Keywords: ex-dividend day; lottery number checking; rationing; tax arbitrage; turn-of-the-year effect; underpricing
JEL Codes: G12; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high-tax investors engage in tax arbitrage (H26) | capital gains tax liabilities are transferred to low-tax investors (H23) |
| risk aversion of tax traders (H26) | risk premium in lottery bond prices (H27) |
| cost of verifying winning numbers (H27) | observable price differences between different bond sequences (G12) |
| marginal tax rates (H29) | price drop of lottery bonds around the coupon lottery (H27) |
| risk-averse tax traders are marginal investors (G11) | systematic examination of tax arbitrage relationships (H26) |