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Securities Transaction Tax and Market Volatility

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  • Frank M. Song
  • Junxi Zhang
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    Abstract

    One well-known regulatory mechanism in securities markets is the use of a securities transaction tax (STT). The conventional wisdom suggests that increases in an STT reduce market volatility by discouraging the trading activity of destabilising short-term traders. A contrary view argues that STT may well increase market volatility due to the reduction in market liquidity. This article rationalises both views in a general equilibrium framework with noise trading. With fundamental risk and supply risk the model is able to document both the conventional wisdom and the contrarian view. We also discuss special cases where there is only fundamental risk or supply risk. Copyright 2005 Royal Economic Society.

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    Bibliographic Info

    Article provided by Royal Economic Society in its journal The Economic Journal.

    Volume (Year): 115 (2005)
    Issue (Month): 506 (October)
    Pages: 1103-1120

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    Handle: RePEc:ecj:econjl:v:115:y:2005:i:506:p:1103-1120

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    Cited by:
    1. Olivier Damette, 2013. "Mixture distribution hypothesis and the impact of a Tobin tax on exhange rate volatility : a reassessment," Working Papers of BETA 2013-07, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    2. Foucault, Thierry & Sraer, David & Thesmar, David, 2008. "Individual Investors and Volatility," CEPR Discussion Papers 6915, C.E.P.R. Discussion Papers.
    3. Lanne , Markku & Vesala , Timo, 2006. "The effect of a transaction tax on exchange rate volatility," Research Discussion Papers 11/2006, Bank of Finland.
    4. Gunther Capelle-Blancard & Olena Havrylchyk, 2014. "The Impact of the French Securities Transaction Tax on Market Liquidity and Volatility," EconomiX Working Papers 2014-27, University of Paris West - Nanterre la Défense, EconomiX.
    5. Xu, Juanyi, 2010. "Noise traders, exchange rate disconnect puzzle, and the Tobin tax," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 336-357, March.
    6. Thornton Matheson, 2012. "Security transaction taxes: issues and evidence," International Tax and Public Finance, Springer, vol. 19(6), pages 884-912, December.
    7. Olivier Damette & Stéphane Goutte, 2014. "Tobin tax and trading volume tightening: a reassessment," Working Papers halshs-00926805, HAL.
    8. Lendvai, Julia & Raciborski, Rafal & Vogel, Lukas, 2013. "Macroeconomic effects of an equity transaction tax in a general-equilibrium model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 466-482.
    9. Frank H. Westerhoff, 2008. "The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 228(2+3), pages 195-227, June.
    10. Rieger, Jörg, 2014. "Financial Transaction Tax and Financial Market Stability with Diverse Beliefs," Working Papers 0563, University of Heidelberg, Department of Economics.

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