Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread
This paper investigates the effects of transaction taxes on depth and bid-ask spread under asymmetric information. The paper uses a static model where a monopolistic market maker faces liquidity and informed traders. Introducing transaction taxes could, surprisingly, lead to increase in depth. Under some distributional assumptions, when market conditions are favorable to the dealer, the spread responds less than proportionally to an increase in the transaction tax while the depth actually increases. In contrast, when market conditions are unfavorable to the dealer, the spread widens more than proportionally and the depth decreases, potentially to zero, in response to an increase in the transaction tax. Our model sheds light on the disagreement in the empirical literature on the relative magnitude of transaction costs on trading volume.
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| Length: | 17 pages |
| Date of creation: | May 2003 |
| Date of revision: | |
| Handle: | RePEc:ihs:ihsesp:132 |
| Contact details of provider: | Postal: Josefstädterstr. 39, A-1080 Vienna, Austria Phone: ++43 - (0)1 - 599 91 - 0 Fax: ++43 - (0)1 - 599 91 - 555 Web page: http://www.ihs.ac.at More information through EDIRC
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| Order Information: | Postal: Institute for Advanced Studies - Library, Josefstädterstr. 39, A-1080 Vienna, Austria |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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LSE Research Online Documents on Economics
451, London School of Economics and Political Science, LSE Library.
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Discussion Papers
570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
- Barclay, Michael J. & Kandel, Eugene & Marx, Leslie M., 1998. "The Effects of Transaction Costs on Stock Prices and Trading Volume," Journal of Financial Intermediation, Elsevier, vol. 7(2), pages 130-150, April.
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