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Securities Transaction Taxes and Financial Markets

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  • Karl Friedrich Habermeier
  • Andrei Kirilenko
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    Abstract

    This paper argues that securities transaction taxes "throw sand" not in the wheels, but into the engine of financial markets where the transformation of latent demands into realized transactions takes place. The paper considers the impact of transaction taxes on financial markets in the context of four questions. How important is trading? What causes price volatility? How are prices formed? How valuable is the volume of transactions? The paper concludes that transaction taxes or such equivalents as capital controls can have negative effects on price discovery, volatility, and liquidity and lead to a reduction in the informational efficiency of markets.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/51.

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    Length: 30
    Date of creation: 01 May 2001
    Date of revision:
    Handle: RePEc:imf:imfwpa:01/51

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    Related research

    Keywords: Capital controls; Bonds; financial markets; bond; securities transaction; stock price; stock exchange; international capital flows; international finance; international capital; stock market; capital flows; option pricing; financial market; call options; financial instruments; financial economics; financial services; securities companies; present value; eurobonds; foreign securities; stock returns; capital markets; stock options; financial assets; options markets; securities ? prices; stock transactions; stock exchanges; capital inflows; financial sector; derivative; stock prices; hedge funds; new york stock exchange; demand for bonds; bond trading; securities transactions; stock trading; securities prices; securities exchange; financial market development; stock transaction; reserve requirement; hedge; derivative market; international financial markets; liberalization of capital; domestic securities; financial system; securities exchange act; forward contracts; national stock exchanges; bourse; financial intermediaries; equity prices; equity markets; stock market index; equity returns; brokerage services;

    This paper has been announced in the following NEP Reports:

    References

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    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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    1. Ian Domowitz & Jack Glen & Ananth Madhavan, 2000. "Liquidity, Volatility, and Equity Trading Costs Across Countries and Over Time," William Davidson Institute Working Papers Series 322, William Davidson Institute at the University of Michigan.
    2. Boyle, Phelim P & Vorst, Ton, 1992. " Option Replication in Discrete Time with Transaction Costs," Journal of Finance, American Finance Association, American Finance Association, vol. 47(1), pages 271-93, March.
    3. Eichengreen, Barry & Tobin, James & Wyplosz, Charles, 1995. "Two Cases for Sand in the Wheels of International Finance," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(428), pages 162-72, January.
    4. Summers, L.H. & Summers, V.P., 1989. "When Financial Markets Work Too Well : A Cautious Case For A Securities Transactions Tax," Papers, Columbia - Center for Futures Markets t12, Columbia - Center for Futures Markets.
    5. Victoria Saporta & Kamhon Kan, 1997. "The effects of Stamp Duty on the Level and Volatility of Equity Prices," Bank of England working papers, Bank of England 71, Bank of England.
    6. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    7. Reinhart, Vincent R, 2000. "How the Machinery of International Finance Runs with Sand in Its Wheels," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 8(1), pages 74-85, February.
    8. Jones, Charles M & Seguin, Paul J, 1997. "Transaction Costs and Price Volatility: Evidence from Commission Deregulation," American Economic Review, American Economic Association, American Economic Association, vol. 87(4), pages 728-37, September.
    9. Marco Pagano & Ailsa Roell, 1990. "Auction Markets, Dealership Markets and Execution Risk," CEPR Financial Markets Paper, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ 0008, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
    10. Madhavan, Ananth & Richardson, Matthew & Roomans, Mark, 1997. "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(4), pages 1035-64.
    11. Hu, Shing-yang, 1998. "The effects of the stock transaction tax on the stock market - Experiences from Asian markets," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 6(3-4), pages 347-364, August.
    12. David Easley & Maureen O'Hara & P.S. Srinivas, 1998. "Option Volume and Stock Prices: Evidence on Where Informed Traders Trade," Journal of Finance, American Finance Association, American Finance Association, vol. 53(2), pages 431-465, 04.
    13. Bekaert, Geert, 1995. "Market Integration and Investment Barriers in Emerging Equity Markets," World Bank Economic Review, World Bank Group, World Bank Group, vol. 9(1), pages 75-107, January.
    14. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers, Columbia - Center for Futures Markets t2, Columbia - Center for Futures Markets.
    15. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. " Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, American Finance Association, vol. 49(1), pages 153-81, March.
    16. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, Elsevier, vol. 3(3), pages 205-258, August.
    17. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(3), pages 229-263, September.
    18. Umlauf, Steven R., 1993. "Transaction taxes and the behavior of the Swedish stock market," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(2), pages 227-240, April.
    19. Roll, R., 1989. "Price Volatility, International Market Links, And Their Implications For Regulatory Policies," Papers, Columbia - Center for Futures Markets t10, Columbia - Center for Futures Markets.
    20. Akira Ariyoshi & Andrei Kirilenko & Inci Ötker & Bernard Laurens & Jorge Iván Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls," IMF Occasional Papers 190, International Monetary Fund.
    21. Hasabrouck, Joel & Sofianos, George, 1993. " The Trades of Market Makers: An Empirical Analysis of NYSE Specialists," Journal of Finance, American Finance Association, American Finance Association, vol. 48(5), pages 1565-93, December.
    22. Oliver Hansch & Narayan Y. Naik & S. Viswanathan, 1998. "Do Inventories Matter in Dealership Markets? Evidence from the London Stock Exchange," Journal of Finance, American Finance Association, American Finance Association, vol. 53(5), pages 1623-1656, October.
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    Cited by:
    1. María Angélica Arbeláez Restrepo & Leonard E. Burman & Sandra Consuelo Zuluaga, 2004. "The bank debit tax in Colombia," WORKING PAPERS SERIES. DOCUMENTOS DE TRABAJO, FEDESARROLLO 003565, FEDESARROLLO.

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