Boom-Bust Cycles and Trading Practices in Asset Markets, the Real Economy and the Effects of a Financial Transactions Tax
AbstractOver the past three decades, trading in asset markets has become progressively more short-term oriented ("faster"), with traders attempting to exploit intraday price trends. Yet, over this time, asset prices have continued to move in a sequence of alternating "bull markets" and "bear markets", often lasting several years. Which type of trading behaviour over the (very) short run leads to the irregular bull and bear phases over the longer run? The paper finds that "bull (bear) markets" are brought about because upward (downward) price runs last longer than counter-movements for an extended period of time. This pattern results from "trading as usual", which employs "technical analysis" to exploit asset price trends and, in doing so, reinforces the price trends. The recent financial crisis spilled over to the real economy mainly through the simultaneous devaluation of stock, housing and commodity wealth. The severity of these "bear markets" was the result of the long upward climb of prices during the preceding "bull markets." The paper argues that a financial transactions tax would reduce the profitability of short-term trend-chasing in derivatives markets (fundamentals-oriented trading would hardly be affected). By doing so, a transactions tax would limit the magnitude of the "long swings" in asset prices.
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Bibliographic InfoPaper provided by WIFO in its series WIFO Working Papers with number 364.
Length: 29 pages
Date of creation: 09 Mar 2010
Date of revision:
Boom and bust of asset prices; speculation; technical trading; transaction tax;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
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- Stephan Schulmeister, .
"The European Monetary Fund. A Systemic Problem Needs a Systemic Solution,"
WIFO Working Papers
- Stephan Schulmeister, 2013. "The European Monetary Fund. A systemic problem needs a systemic solution," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 389-424.
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