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Some effects of transaction taxes under different microstructures

Author

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  • Paolo Pellizzari

    (Department of Applied Mathematics, University of Venice)

  • Frank Westerhoff

    (Department of Economics, Bamberg - Germany)

Abstract

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 become 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.

Suggested Citation

  • Paolo Pellizzari & Frank Westerhoff, 2009. "Some effects of transaction taxes under different microstructures," Working Papers 190, Department of Applied Mathematics, Università Ca' Foscari Venezia.
    • Handle: RePEc:vnm:wpaper:190
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    More about this item

    Keywords

    Transaction tax; Tobin tax; microstructures; agent-based models; liquidity.;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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