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Some effects of transaction taxes under different microstructures

  • Pellizzari, Paolo
  • Westerhoff, Frank

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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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 72 (2009)
Issue (Month): 3 (December)
Pages: 850-863

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Handle: RePEc:eee:jeborg:v:72:y:2009:i:3:p:850-863
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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