Market consistent valuation of deferred taxes

Market consistent valuation of deferred taxes

de Vries, Tjeerd (TU Delft Electrical Engineering, Mathematics and Computer Science)

Cirillo, Pasquale (mentor)
van Oord, Arco (mentor)
Oosterlee, Kees (graduation committee)

Delft University of Technology

Applied Mathematics

2018-04-10

This thesis develops a continuous time framework to value deferred taxes using
Black and Scholes (1973) type option pricing techniques. The valuation renders a
market consistent pricing procedure, which avoids the necessity of subjective accounting principles. Our framework is flexible enough to value deferred taxes like carry forward, carry back or liabilities arising from temporary differences relying solely on quantities observed in the market. A simulation study over multiple time horizons shows that carry forward value is negatively influenced by leverage, whereas carry back and tax liability values increase. Two empirical applications serve to illustrate the practical use of our model: the loss absorbing capacity of deferred taxes for European insurers and an estimate of BP's loss of deferred taxes following the U.S. tax overhaul.

Deferred tax valuation
Martingale pricing
Optimal capital structures
Loss absorbing capacity of deferred taxes

http://resolver.tudelft.nl/uuid:21c30103-ffc7-4592-854a-c3185f835b2a

Subsections 5.1.1 and 5.1.2 are deleted since they make use of confidential data.

Student theses

master thesis

© 2018 Tjeerd de Vries