This paper develops an equilibrium asset pricing model with taxation in the economy. The expected excess rate of return on a risky asset is shown to be an increasing function of the covariance of asset return with aggregate consumption rate changes and the covariance of asset return with the tax rates as well. Thus, the expected execss rate of return can be decom- posed as the consumption risk premium and the tax premium. The capital asset pricing model derived in the absence of taxes is shown to understate the expected excess rate of return and to have a misspecification error in the economy with taxation.
학술대회
International Conference