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Some effects of transaction taxes under different microstructures

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  • Paolo Pellizzari

    ()
    (Department of Applied Mathematics, University of Venice)

  • Frank Westerhoff

    ()
    (Department of Economics, Bamberg - Germany)

Abstract

We show that the effectiveness of transaction taxes depends on the market microstructure. Within our model, heterogeneous traders use a blend of technical and fundamental trading strategies to determine their orders. In addition, they may become inactive if the profitability of trading decreases. We find that in a continuous double auction market the imposition of a transaction tax is not likely to stabilize financial markets since a reduction in market liquidity amplifies the average price impact of a given order. In a dealership market, however, abundant liquidity is provided by specialists, and thus a transaction tax may reduce volatility by crowding out speculative orders.

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Bibliographic Info

Paper provided by Department of Applied Mathematics, Università Ca' Foscari Venezia in its series Working Papers with number 190.

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Length: 29 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:vnm:wpaper:190

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Keywords: Transaction tax; Tobin tax; microstructures; agent-based models; liquidity.;

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Citations

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Cited by:
  1. Huber, Jürgen & Kleinlercher, Daniel & Kirchler, Michael, 2012. "The impact of a financial transaction tax on stylized facts of price returns—Evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(8), pages 1248-1266.
  2. Thomas Hemmelgarn & Gaëtan Nicodème, 2010. "The 2008 Financial Crisis and Taxation Policy," Working Papers CEB, ULB -- Universite Libre de Bruxelles 10-006.RS, ULB -- Universite Libre de Bruxelles.
  3. Iori, G. & Porter, J., 2012. "Agent-Based Modelling for Financial Markets," Working Papers, Department of Economics, City University London 12/08, Department of Economics, City University London.
  4. Thornton Matheson, 2012. "Security transaction taxes: issues and evidence," International Tax and Public Finance, Springer, Springer, vol. 19(6), pages 884-912, December.
  5. Rosenthal, Dale W.R. & Thomas, Nordia Diana Marie, 2012. "Transact taxes in a price maker/taker market," MPRA Paper 40556, University Library of Munich, Germany.
  6. Chia-Hsuan Yeh & Chun-Yi Yang, 2013. "Do price limits hurt the market?," Journal of Economic Interaction and Coordination, Springer, vol. 8(1), pages 125-153, April.
  7. Westerhoff, Frank & Franke, Reiner, 2012. "Agent-based models for economic policy design: Two illustrative examples," BERG Working Paper Series 88, Bamberg University, Bamberg Economic Research Group.
  8. Huber, Jürgen & Kirchler, Michael & Kleinlercher, Daniel & Sutter, Matthias, 2014. "Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax," IZA Discussion Papers 7978, Institute for the Study of Labor (IZA).
  9. Kirchler, Michael & Huber, Jürgen & Kleinlercher, Daniel, 2011. "Market microstructure matters when imposing a Tobin tax—Evidence from the lab," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 80(3), pages 586-602.
  10. Daniel Fricke & Thomas Lux, 2013. "The Effects of a Financial Transaction Tax in an Artificial Financial Market," Kiel Working Papers 1868, Kiel Institute for the World Economy.
  11. Frank H. Westerhoff, 2008. "The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies," 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 195-227, June.
  12. Olivier Damette, 2013. "Mixture distribution hypothesis and the impact of a Tobin tax on exhange rate volatility : a reassessment," Working Papers of BETA 2013-07, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  13. Lendvai, Julia & Raciborski, Rafal & Vogel, Lukas, 2013. "Macroeconomic effects of an equity transaction tax in a general-equilibrium model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(2), pages 466-482.
  14. Carl Chiarella & Xue-Zhong He & Paolo Pellizzari, 2009. "A Dynamic Analysis of the Microstructure of Moving Average Rules in a Double Auction Market," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 251, Quantitative Finance Research Centre, University of Technology, Sydney.
  15. Yeh, Chia-Hsuan & Yang, Chun-Yi, 2010. "Examining the effectiveness of price limits in an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(10), pages 2089-2108, October.

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