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Security Transaction Taxes and Market Quality

  • Anna Pomeranets
  • Daniel G. Weaver
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    We examine nine changes in the New York State Security Transaction Taxes (STT) between 1932 and 1981. We find that imposing or increasing an STT results in wider bidask spreads, lower volume, and increased price impact of trades. In contrast to theories of STT imposition as a means to reduce volatility, we find no consistent relationship between the level of an STT and volatility. We examine the propensity of traders to switch trading locations to avoid the tax and find no consistent evidence that they will change locations. We do find evidence to suggest that taxes imposed on the par value of stock will result in corporations managing the par value in the direction of minimizing the impact of the tax on investors.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2011/11/wp2011-26.pdf
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    Paper provided by Bank of Canada in its series Working Papers with number 11-26.

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    Length: 51 pages
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:bca:bocawp:11-26
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    1. Christie, William G & Schultz, Paul H, 1994. " Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1813-40, December.
    2. John Y. Campbell & Kenneth A. Froot, 1994. "International Experiences with Securities Transaction Taxes," NBER Chapters, in: The Internationalization of Equity Markets, pages 277-308 National Bureau of Economic Research, Inc.
    3. Robert Bloomfield & Maureen O'Hara & Gideon Saar, 2009. "How Noise Trading Affects Markets: An Experimental Analysis," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2275-2302, June.
    4. Jarrell, Gregg A, 1984. "Change at the Exchange: The Causes and Effects of Deregulation," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 273-312, October.
    5. Kate Phylaktis & Antonis Aristidou, 2007. "Security transaction taxes and financial volatility: Athens stock exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 17(18), pages 1455-1467.
    6. Goyenko, Ruslan Y. & Holden, Craig W. & Trzcinka, Charles A., 2009. "Do liquidity measures measure liquidity?," Journal of Financial Economics, Elsevier, vol. 92(2), pages 153-181, May.
    7. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
    8. Umlauf, Steven R., 1993. "Transaction taxes and the behavior of the Swedish stock market," Journal of Financial Economics, Elsevier, vol. 33(2), pages 227-240, April.
    9. Shinhua Liu, 2007. "Securities Transaction Tax and Market Efficiency: Evidence from the Japanese Experience," Journal of Financial Services Research, Springer, vol. 32(3), pages 161-176, December.
    10. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    11. Summers, L.H. & Summers, V.P., 1989. "When Financial Markets Work Too Well : A Cautious Case For A Securities Transactions Tax," Papers t12, Columbia - Center for Futures Markets.
    12. Harald Hau, 2006. "The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse," Journal of the European Economic Association, MIT Press, vol. 4(4), pages 862-890, 06.
    13. Badi Baltagi & Dong Li & Qi Li, 2006. "Transaction tax and stock market behavior: evidence from an emerging market," Empirical Economics, Springer, vol. 31(2), pages 393-408, June.
    14. Roll, R., 1989. "Price Volatility, International Market Links, And Their Implications For Regulatory Policies," Papers t10, Columbia - Center for Futures Markets.
    15. Jones, Charles M & Seguin, Paul J, 1997. "Transaction Costs and Price Volatility: Evidence from Commission Deregulation," American Economic Review, American Economic Association, vol. 87(4), pages 728-37, September.
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