The effect of a transaction tax on exchange rate volatility
AbstractWe argue that a transaction tax is likely to amplify, not dampen, volatility in foreign exchange markets. Our argument stems from the decentralized trading practice and the presumable discrepancy between 'informed' and 'uninformed' traders' valuations. Given that the informed valuations are likely to be less dispersed, a transaction tax penalizes informed trades disproportionately, leading to increased volatility. Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM|USD and JPY|USD returns. High-frequency data are used and an increase in transaction costs is found to have a significant positive effect on volatility. Copyright © 2009 John Wiley & Sons, Ltd.
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Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.
Volume (Year): 15 (2010)
Issue (Month): 2 ()
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Web page: http://www.interscience.wiley.com/jpages/1076-9307/
Other versions of this item:
- Lanne , Markku & Vesala , Timo, 2006. "The effect of a transaction tax on exchange rate volatility," Research Discussion Papers 11/2006, Bank of Finland.
- Markku Lanne & Timo Vesalay, 2005. "The Effect of a Transaction Tax on Exchange Rate Volatility," Economics Working Papers ECO2005/19, European University Institute.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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