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Tobin tax and market depth

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  • G. Ehrenstein
  • F. Westerhoff
  • D. Stauffer

Abstract

This paper investigates - on the basis of the Cont-Bouchaud model - whether a Tobin tax can stabilize foreign exchange markets. Compared to earlier studies, this paper explicitly recognizes that a transaction tax-induced reduction in market depth may increase the price responsiveness of a given order. We find that the imposition of a transaction tax may still achieve a triple dividend: (1) exchange rate fluctuations decrease, (2) currencies are less mispriced, and (3) central authorities raise substantial tax revenues. However, if the price impact function is too sensitive with respect to market depth, stabilization may turn into destabilization.

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Paper provided by arXiv.org in its series Papers with number cond-mat/0311581.

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Date of creation: Nov 2003
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Handle: RePEc:arx:papers:cond-mat/0311581

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  1. Rama Cont & Jean-Philippe Bouchaud, 1997. "Herd behavior and aggregate fluctuations in financial markets," Science & Finance (CFM) working paper archive 500028, Science & Finance, Capital Fund Management.
  2. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
  3. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  4. Kempf, Alexander & Korn, Olaf, 1999. "Market depth and order size1," Journal of Financial Markets, Elsevier, Elsevier, vol. 2(1), pages 29-48, February.
  5. Vasiliki Plerou & Parameswaran Gopikrishnan & Xavier Gabaix & H. Eugene Stanley, 2001. "Quantifying Stock Price Response to Demand Fluctuations," Papers cond-mat/0106657, arXiv.org.
  6. Cont, Rama & Bouchaud, Jean-Philipe, 2000. "Herd Behavior And Aggregate Fluctuations In Financial Markets," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 4(02), pages 170-196, June.
  7. Mende, Alexander & Menkhoff, Lukas, 2003. "Tobin Tax Effects Seen from the Foreign Exchange Market's Microstructure," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 6(2), pages 227-47, Summer.
  8. Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B, University of Bonn, Germany 437, University of Bonn, Germany, revised Jul 1998.
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Citations

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Cited by:
  1. E. Samanidou & E. Zschischang & D. Stauffer & T. Lux, 2001. "Microscopic Models of Financial Markets," Papers cond-mat/0110354, arXiv.org.
  2. Huber, Jürgen & Kleinlercher, Daniel & Kirchler, Michael, 2012. "The impact of a financial transaction tax on stylized facts of price returns—Evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(8), pages 1248-1266.
  3. Ginestra Bianconi & Tobias Galla & Matteo Marsili, 2006. "Effects of Tobin Taxes in Minority Game markets," Papers cond-mat/0603134, arXiv.org.
  4. 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, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 228(2+3), pages 195-227, June.
  5. Samuel N. Cohen & Lukasz Szpruch, 2011. "A limit order book model for latency arbitrage," Papers 1110.4811, arXiv.org.
  6. Paolo Pellizzari & Frank Westerhoff, 2009. "Some effects of transaction taxes under different microstructures," Working Papers, Department of Applied Mathematics, Università Ca' Foscari Venezia 190, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  7. Olivier Damette, 2009. "Exchange rate volatility and noise traders: Currency Transaction Tax as an eviction device," Economics Bulletin, AccessEcon, vol. 29(3), pages 2449-2464.
  8. Westerhoff, Frank H. & Dieci, Roberto, 2006. "The effectiveness of Keynes-Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(2), pages 293-322, February.
  9. Kirchler, Michael & Huber, Jürgen & Kleinlercher, Daniel, 2011. "Market microstructure matters when imposing a Tobin tax—Evidence from the lab," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 80(3), pages 586-602.
  10. Huber, Jürgen & Kirchler, Michael & Kleinlercher, Daniel & Sutter, Matthias, 2014. "Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax," IZA Discussion Papers 7978, Institute for the Study of Labor (IZA).
  11. Bianconi, Ginestra & Galla, Tobias & Marsili, Matteo & Pin, Paolo, 2009. "Effects of Tobin taxes in minority game markets," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 70(1-2), pages 231-240, May.
  12. Hanke, Michael & Huber, Jürgen & Kirchler, Michael & Sutter, Matthias, 2010. "The economic consequences of a Tobin tax--An experimental analysis," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 74(1-2), pages 58-71, May.
  13. Markus Demary, 2008. "Who Does a Currency Transaction Tax Harm More: Short-Term Speculators or Long-Term Investors?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 228(2+3), pages 228-250, June.
  14. Mannaro, Katiuscia & Marchesi, Michele & Setzu, Alessio, 2008. "Using an artificial financial market for assessing the impact of Tobin-like transaction taxes," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 67(2), pages 445-462, August.
  15. 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.

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