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Transaction tax and market quality of the Taiwan stock index futures


  • Robin K. Chou
  • George H. K. Wang


On May 1, 2000, the Taiwan government reduced the tax levied on futures transactions on the Taiwan Futures Exchange from 5 to 2.5 basis points. This event provides a unique opportunity to test empirically the impact of a tax rate reduction on trading volume, bid‐ask spreads, and price volatility. Intraday and daily time series data from May 1, 1999, through April 30, 2001, are tested in a three‐equation structural model. Findings show that transaction taxes have a negative impact on trading volume and bid‐ask spreads, as trading volume increased and bid‐ask spreads decreased in the period following the reduction in the transaction tax. This study's analysis is not consistent with the argument that the imposition of a transaction tax may reduce price volatility because there are no significant changes in price volatility after the tax reduction. Further, it was found that although the reduction in the transaction tax did reduce tax revenues, the proportional decrease in tax revenues is less than the 50% reduction in the tax rate. Finally, tax revenues in the second and third year after the tax reduction increased, as compared to the year before the tax reduction. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1195–1216, 2006

Suggested Citation

  • Robin K. Chou & George H. K. Wang, 2006. "Transaction tax and market quality of the Taiwan stock index futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(12), pages 1195-1216, December.
  • Handle: RePEc:wly:jfutmk:v:26:y:2006:i:12:p:1195-1216

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    2. Lillo, Felipe & Valdés, Rodrigo, 2016. "Dynamics of financial markets and transaction costs: A graph-based study," Research in International Business and Finance, Elsevier, vol. 38(C), pages 455-465.
    3. Capelle-Blancard, Gunther & Havrylchyk, Olena, 2016. "The impact of the French securities transaction tax on market liquidity and volatility," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 166-178.
    4. repec:hal:journl:halshs-00940251 is not listed on IDEAS
    5. Neil McCulloch & Grazia Pacillo, 2010. "The Tobin Tax A Review of the Evidence," Working Paper Series 1611, Department of Economics, University of Sussex Business School.
    6. Yuming Fu & Wenlan Qian & Bernard Yeung, 2016. "Speculative Investors and Transactions Tax: Evidence from the Housing Market," Management Science, INFORMS, vol. 62(11), pages 3254-3270, November.
    7. repec:eee:pacfin:v:51:y:2018:i:c:p:366-375 is not listed on IDEAS
    8. Sinha, Pankaj & Mathur, Kritika, 2015. "Impact of Commodities Transaction Tax on Indian Commodity Futures," MPRA Paper 63677, University Library of Munich, Germany.
    9. Yongheng Deng & Xin Liu & Shang-Jin Wei, 2014. "One Fundamental and Two Taxes: When Does a Tobin Tax Reduce Financial Price Volatility?," NBER Working Papers 19974, National Bureau of Economic Research, Inc.
    10. Carlos Contreras & Mónica Contreras, 2015. "Estimación de la recaudación del Impuesto sobre Transacciones Financieras: el caso español," Hacienda Pública Española, IEF, vol. 213(2), pages 109-143, June.
    11. repec:eee:finana:v:53:y:2017:i:c:p:12-24 is not listed on IDEAS
    12. Hao, Ying & Chou, Robin K. & Ho, Keng-Yu & Weng, Pei-Shih, 2015. "The impact of foreign institutional traders on price efficiency: Evidence from the Taiwan futures market," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 24-42.
    13. Cappelletti, Giuseppe & Guazzarotti, Giovanni & Tommasino, Pietro, 2017. "The stock market effects of a securities transaction tax: Quasi-experimental evidence from Italy," Journal of Financial Stability, Elsevier, vol. 31(C), pages 81-92.
    14. Eichfelder, Sebastian & Lau, Mona, 2016. "Financial transaction taxes: Announcement effects, short-run effects, and long-run effects," arqus Discussion Papers in Quantitative Tax Research 211, arqus - Arbeitskreis Quantitative Steuerlehre.
    15. Thornton Matheson, 2011. "Taxing Financial Transactions; Issues and Evidence," IMF Working Papers 11/54, International Monetary Fund.
    16. Michał Zator, 2014. "Transaction costs and volatility on Warsaw Stock Exchange: implications for financial transaction tax," Bank i Kredyt, Narodowy Bank Polski, vol. 45(4), pages 349-372.
    17. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4.
    18. repec:esr:resser:bkmnext217 is not listed on IDEAS
    19. Merz, Julia & Overesch, Michael, 2016. "Profit shifting and tax response of multinational banks," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 57-68.
    20. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.

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