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Some effects of transaction taxes under different microstructures

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Author Info
Paolo Pellizzari () (Department of Applied Mathematics, University of Venice)
Frank Westerhoff () (Department of Economics, Bamberg - Germany)

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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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File URL: http://www.dma.unive.it/wpdma/2009wp190.pdf
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File Function: First version, 2009
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Publisher Info
Paper provided by Department of Applied Mathematics, University of Venice 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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Related research
Keywords: Transaction tax; Tobin tax; microstructures; agent-based models; liquidity.;

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Find related papers by JEL classification:
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions

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