Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread
AbstractThis paper investigates the effects of transaction taxes on depth and bid-ask spread under asymmetric information. The paper uses a static model where a monopolistic market maker faces liquidity and informed traders. Introducing transaction taxes could, surprisingly, lead to increase in depth. Under some distributional assumptions, when market conditions are favorable to the dealer, the spread responds less than proportionally to an increase in the transaction tax while the depth actually increases. In contrast, when market conditions are unfavorable to the dealer, the spread widens more than proportionally and the depth decreases, potentially to zero, in response to an increase in the transaction tax. Our model sheds light on the disagreement in the empirical literature on the relative magnitude of transaction costs on trading volume.
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 31 (2007)
Issue (Month): 2 (May)
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
Other versions of this item:
- Dupont, Dominique Y. & Lee, Gabriel S., 2003. "Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread," Economics Series 132, Institute for Advanced Studies.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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