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 InfoPaper provided by Institute for Advanced Studies in its series Economics Series with number 132.
Length: 17 pages
Date of creation: May 2003
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Other versions of this item:
- Dominique Dupont & Gabriel Lee, 2007. "Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread," Economic Theory, Springer, vol. 31(2), pages 393-400, May.
- 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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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