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Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread

Author

Listed:
  • Dupont, Dominique Y.

    (University of Twente, School of Management and Technology, Department of Finance and Accounting)

  • Lee, Gabriel S.

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna)

Abstract

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.

Suggested Citation

  • Dupont, Dominique Y. & Lee, Gabriel S., 2003. "Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread," Economics Series 132, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihsesp:132
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    File URL: http://www.ihs.ac.at/publications/eco/es-132.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Subrahmanyam, Avanidhar, 1998. "Transaction Taxes and Financial Market Equilibrium," The Journal of Business, University of Chicago Press, vol. 71(1), pages 81-118, January.
    3. 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.
    4. Dow, James & Rahi, Rohit, 2000. "Should Speculators Be Taxed?," The Journal of Business, University of Chicago Press, vol. 73(1), pages 89-107, January.
    5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    6. Vayanos, Dimitri, 1998. "Transaction Costs and Asset Prices: A Dynamic Equilibrium Model," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 1-58.
    7. George M. Constantinides, 2005. "Capital Market Equilibrium with Transaction Costs," World Scientific Book Chapters,in: Theory Of Valuation, chapter 7, pages 207-227 World Scientific Publishing Co. Pte. Ltd..
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Antonio Guarino & Andreas Uthemann & Marco Cipriani, 2015. "Financial Transaction Taxes anf the Informational Efficiency of Financial Markets: A Structural Estimation," 2015 Meeting Papers 1165, Society for Economic Dynamics.
    2. repec:eee:finsta:v:31:y:2017:i:c:p:81-92 is not listed on IDEAS
    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:eee:jeborg:v:157:y:2019:i:c:p:15-41 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. Sandrine Jacob Leal & Mauro Napoletano, 2016. "Market Stability vs. Market Resilience: Regulatory Policies Experiments in an Agent-Based Model with Low- and High- Frequency Trading," Sciences Po publications 2016-12, Sciences Po.
    7. Walch, Florian & Lennkh, Rudolf Alvise, 2015. "Collateral damage? Micro-simulation of transaction cost shocks on the value of central bank collateral," Working Paper Series 1793, European Central Bank.
    8. Lensberg, Terje & Schenk-Hoppé, Klaus Reiner & Ladley, Dan, 2015. "Costs and benefits of financial regulation: Short-selling bans and transaction taxes," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 103-118.
    9. Thornton Matheson, 2012. "Security transaction taxes: issues and evidence," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(6), pages 884-912, December.
    10. repec:bla:eufman:v:22:y:2016:i:2:p:313-337 is not listed on IDEAS
    11. Dieler, T., 2014. "Essays on asset trading," Other publications TiSEM ea0c811e-e335-402f-a3e2-8, Tilburg University, School of Economics and Management.
    12. Lensberg, Terje & Schenk-Hoppé, Klaus Reiner & Ladley, Dan, 2012. "Costs and Benefits of Speculation," Discussion Papers 2012/12, Norwegian School of Economics, Department of Business and Management Science.
    13. Thornton Matheson, 2011. "Taxing Financial Transactions; Issues and Evidence," IMF Working Papers 11/54, International Monetary Fund.
    14. Rudolf Alvise Lennkh & Florian Walch, 2015. "Collateral Damage? Micro-Simulation of Transaction Cost Shocks on the Value of Central Bank Collateral," Working Papers 6, European Stability Mechanism.
    15. 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.

    More about this item

    Keywords

    Asymmetric information; Securities transaction taxes; Liquidity;

    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

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