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Financial transaction taxes and the informational efficiency of financial markets: a structural estimation

Author

Listed:
  • Marco Cipriani

    (Institute for Fiscal Studies)

  • Antonio Guarino

    (Institute for Fiscal Studies)

  • Andreas Uthemann

    (Institute for Fiscal Studies)

Abstract

We develop a new methodology to estimate the impact of a financial transaction tax (FTT) on informational efficiency, liquidity and volatility. In our sequential trading model there are price elastic noise traders and traders with private information of heterogeneous quality. We estimate the model without a tax and then quantify the effect of an FTT. In our sample, noise traders are price elastic but less so than informed traders. The introduction of an FTT changes the composition of the market, lowering informational efficiency. Even a small, 5 bps, FTT impedes correct price convergence on a sizeable percentage of days.

Suggested Citation

  • Marco Cipriani & Antonio Guarino & Andreas Uthemann, 2019. "Financial transaction taxes and the informational efficiency of financial markets: a structural estimation," CeMMAP working papers CWP07/19, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:cemmap:07/19
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    References listed on IDEAS

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    Cited by:

    1. Pengguang Lu, 2023. "A Simple Model of Herding and Contrarian Behaviour with Biased Informed Traders," Economics Discussion Paper Series 2307, Economics, The University of Manchester, revised Dec 2023.

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    More about this item

    Keywords

    Financial Transaction Tax; Market Microstructure; Structural Estimation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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