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Tobin tax and trading volume tightening: a reassessment

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  • Olivier Damette

    ()
    (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université de Strasbourg - Université Nancy II)

  • Stéphane Goutte

    ()
    (LED - Laboratoire d'Economie Dionysien - Université Paris VIII - Vincennes Saint-Denis : EA3391)

Abstract

This article extends the previous literature on the Tobin tax and financial transaction tax. We investigate the linkages between trading volumes and transaction costs using both a linear and a nonlinear methodology. In stark contrast with previous studies, we consider the possibility that our model may exhibit threshold effects or regime dependency by estimating a Markov Switching (MS) model. This paper is the first contribution to specify the trading volume of the Forex through different (low and high volatility) regimes. Our empirical investigation looks at the EUR/USD currency market. Our results show evidence of nonlinear patterns for trading volumes and transaction costs on the Forex. The Tobin tax would not have a monotonic impact on trading activity across market conditions. However, the change in elasticity between low and high volatility regimes is slight (-0.17 versus -0.21). We may suggest that the low-variance regime might be the fundamentalist regime and the high- variance regime (lower Tobin tax elasticity) might be the chartist regime. This study is a first step towards understanding which categories of agents dominate the market under the various market regimes and how they would react to the introduction of a tax. This means our results are consistent with Tobin's underlying thinking (1974, 1978, 1996). Since a tax would penalize chartists more than fundamentalists, it could reduce exchange rate volatility.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00926805.

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Date of creation: 09 Jan 2014
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Handle: RePEc:hal:wpaper:halshs-00926805

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Related research

Keywords: Tobin tax; trading volume; Forex; transaction costs; global financial crisis; Markov switching.;

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  1. 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.
  2. BAUWENS, Luc & RIME, Dagfinn & SUCARRAT, Genaro, . "Exchange rate volatility and the mixture of distribution hypothesis," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1788, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  4. Vigfusson, R., 1996. "Switching Between Chartists and Fundamentalists: A Markov Regime-Switching Approach," Working Papers, Bank of Canada 96-1, Bank of Canada.
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  6. Robert Z. Aliber & Bhagwan Chowdhry & Shu Yan, 2003. "Some Evidence that a Tobin Tax on Foreign Exchange Transactions May Increase Volatility," Review of Finance, Springer, Springer, vol. 7(3), pages 481-510.
  7. Carrasco, Marine, 2002. "Misspecified Structural Change, Threshold, and Markov-switching models," Journal of Econometrics, Elsevier, Elsevier, vol. 109(2), pages 239-273, August.
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  10. Marie Bessec & François-Mathieu Robineau, 2003. "Comportements chartistes et fondamentalistes. Coexistence ou domination alternative sur le marché des changes?," Revue économique, Presses de Sciences-Po, Presses de Sciences-Po, vol. 54(6), pages 1213-1238.
  11. Jeffrey Frankel., 1995. "How Well Do Foreign Exchange Markets Function: Might a Tobin Tax Help?," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C95-058, University of California at Berkeley.
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  14. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 163-82, April.
  15. Francis Bismans & Olivier Damette, 2008. "Currency Transaction Tax Elasticity: an Econometric Estimation," Economie Internationale, CEPII research center, CEPII research center, issue 115, pages 193-212.
  16. 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.
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  19. Neil McCulloch & Grazia Pacillo, 2011. "The Tobin Tax A Review of the Evidence," Working Paper Series 1611, Department of Economics, University of Sussex.
  20. Frank Westerhoff, 2003. "Heterogeneous traders and the Tobin tax," Journal of Evolutionary Economics, Springer, Springer, vol. 13(1), pages 53-70, 02.
  21. de Jong, Eelke & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2010. "Heterogeneity of agents and exchange rate dynamics: Evidence from the EMS," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(8), pages 1652-1669, December.
  22. Park, Beum-Jo, 2010. "Surprising information, the MDH, and the relationship between volatility and trading volume," Journal of Financial Markets, Elsevier, Elsevier, vol. 13(3), pages 344-366, August.
  23. Hartmann, Philipp, 1999. "Trading volumes and transaction costs in the foreign exchange market: Evidence from daily dollar-yen spot data," Journal of Banking & Finance, Elsevier, Elsevier, vol. 23(5), pages 801-824, May.
  24. Park, Beum-Jo, 2011. "Asymmetric herding as a source of asymmetric return volatility," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(10), pages 2657-2665, October.
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