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Financial Transaction Taxes, Market Composition, and Liquidity

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  • JEAN†EDOUARD COLLIARD
  • PETER HOFFMANN

Abstract

We use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on its impact. We find no support for the idea that an FTT improves market quality by affecting the composition of trading volume. Instead, our results are in line with the hypothesis that a lower trading volume reduces liquidity and in turn market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short†term to long†term investors. Finally, we find that moderate aggregate effects on market quality can mask large adjustments made by individual agents.

Suggested Citation

  • Jean†Edouard Colliard & Peter Hoffmann, 2017. "Financial Transaction Taxes, Market Composition, and Liquidity," Journal of Finance, American Finance Association, vol. 72(6), pages 2685-2716, December.
    • Handle: RePEc:bla:jfinan:v:72:y:2017:i:6:p:2685-2716
    DOI: 10.1111/jofi.12510
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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