Drastic changes in transaction tax on securities trading in both Sweden and Finland give us a unique opportunity to study the effects of a purely exogenous change in transaction costs. The impact on turnover can be predicted accurately using a simple model. Lower transaction costs cause significant increases in turnover with an elasticity of approximately -1. We apply an asset-pricing model that is able to predict asset price changes. The transaction cost elasticity in asset prices is -0.20 for Sweden and -0.21 for Finland. Volatility in securities prices is significantly reduced when transaction costs decrease. We find that the security transaction tax changes are crucial for the increase in activity and prices that are observed on both markets.Keywords: Security Transaction Tax, Transaction Cost, Transaction cost elasticityJEL classification: G12, G28
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