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Some Effects of Transaction Taxes Under Different Microstructures

  • Paolo Pelizzari
  • Frank Westerhoff

We show that the effectiveness of transaction taxes depends on the market microstructure. Within our model, heterogeneous traders use a blend of technical and fundamental trading strategies to determine their orders. In addition, they may turn inactive if the profitability of trading decreases. We find that in a continuous double auction market the imposition of a transaction tax is not likely to stabilize financial markets since a reduction in market liquidity amplifies the average price impact of a given order. In a dealership market, however, abundant liquidity is provided by specialists and thus a transaction tax may reduce volatility by crowding out speculative orders.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp212.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 212.

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Length: 23
Date of creation: 01 Dec 2007
Date of revision:
Handle: RePEc:uts:rpaper:212
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Web page: http://www.qfrc.uts.edu.au/

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