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Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread

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Author Info
Dupont, Dominique Y. (University of Twente, School of Management and Technology, Department of Finance and Accounting)
Lee, Gabriel S. (Department of Economics and Finance, Institute for Advanced Studies, Vienna)

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Abstract

This 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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File URL: http://www.ihs.ac.at/publications/eco/es-132.pdf
File Format: application/pdf
File Function: First version, 2003
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Publisher Info
Paper provided by Institute for Advanced Studies in its series Economics Series with number 132.

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Length: 17 pages
Date of creation: May 2003
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Handle: RePEc:ihs:ihsesp:132

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Related research
Keywords: Asymmetric information; Securities transaction taxes; Liquidity;

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Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

References listed on IDEAS
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  1. Subrahmanyam, Avanidhar, 1998. "Transaction Taxes and Financial Market Equilibrium," Journal of Business, University of Chicago Press, vol. 71(1), pages 81-118, January. [Downloadable!] (restricted)
  2. Barclay, Michael J. & Kandel, Eugene & Marx, Leslie M., 1998. "The Effects of Transaction Costs on Stock Prices and Trading Volume," Journal of Financial Intermediation, Elsevier, vol. 7(2), pages 130-150, April. [Downloadable!] (restricted)
  3. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March. [Downloadable!] (restricted)
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  4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  5. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August. [Downloadable!] (restricted)
  6. Vayanos, Dimitri, 1998. "Transaction Costs and Asset Prices: A Dynamic Equilibrium Model," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(1), pages 1-58.
  7. Dow, James & Rahi, Rohit, 2000. "Should Speculators Be Taxed?," Journal of Business, University of Chicago Press, vol. 73(1), pages 89-107, January. [Downloadable!] (restricted)
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This page was last updated on 2009-12-10.

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