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Turnover tax and trading volume: Panel analysis of stocks traded in the Japanese and US markets

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  • Ono, Hiroyuki
  • Hayashida, Minoru
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    Abstract

    Japan eliminated turnover tax on stock trading through the end of the 1990's to revitalize its ailing stock market by reducing the overall transaction cost for stock trading. This paper empirically examines the effect of this exogenous, institutional change in tax policy on stock trading volume in the Japanese market. To do so, we use panel data of stocks traded in both the Japanese and United States markets and compare changes in their trading volumes at the times of the tax changes. We use a well-established V-shape relationship between turnover and price change, with three different assumptions as regards how the price change relates to turnover across stocks and markets. Although a model allowing for both slope and intercept shifts does not offer any indications one way or the other, a more restricted model allowing only for an intercept shift clearly suggests a statistically significant increase in trading volume in the Japanese market but not in the United States markets for April 1999. However, such a result was not obtained for April 1996. These results indicate that the abolition of turnover tax in 1999, but not the rate reduction in 1996, contributed to the trading volume increase.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

    Volume (Year): 23 (2009)
    Issue (Month): 3 (September)
    Pages: 241-263

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    Handle: RePEc:eee:jjieco:v:23:y:2009:i:3:p:241-263

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    Web page: http://www.elsevier.com/locate/inca/622903

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    Keywords: Turnover tax Taxation on financial transactions Stock trading volume Japanese;

    References

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    1. Craig S. Hakkio, 1994. "Should we throw sand in the gears of financial markets?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 17-30.
    2. Dimitri Vayanos, 1998. "Transaction costs and asset prices : a dynamic equilibrium model," LSE Research Online Documents on Economics 451, London School of Economics and Political Science, LSE Library.
    3. Umlauf, Steven R., 1993. "Transaction taxes and the behavior of the Swedish stock market," Journal of Financial Economics, Elsevier, vol. 33(2), pages 227-240, April.
    4. Summers, L.H. & Summers, V.P., 1989. "When Financial Markets Work Too Well : A Cautious Case For A Securities Transactions Tax," Papers t12, Columbia - Center for Futures Markets.
    5. Roll, R., 1989. "Price Volatility, International Market Links, And Their Implications For Regulatory Policies," Papers t10, Columbia - Center for Futures Markets.
    6. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
    7. Ross, S.A., 1989. "Commentary: Using Tax Policy To Curb Speculative Short-Term Trading," Papers t3, Columbia - Center for Futures Markets.
    8. Barclay, Michael J. & Kandel, Eugene & Marx, Leslie M., 1998. "The Effects of Transaction Costs on Stock Prices and Trading Volume," Journal of Financial Intermediation, Elsevier, vol. 7(2), pages 130-150, April.
    9. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August.
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