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Boom-Bust Cycles and Trading Practices in Asset Markets, the Real Economy and the Effects of a Financial Transactions Tax

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  • Stephan Schulmeister

Abstract

Over the past three decades, trading in asset markets has become progressively more short-term oriented ("faster"), with traders attempting to exploit intraday price trends. Yet, over this time, asset prices have continued to move in a sequence of alternating "bull markets" and "bear markets", often lasting several years. Which type of trading behaviour over the (very) short run leads to the irregular bull and bear phases over the longer run? The paper finds that "bull (bear) markets" are brought about because upward (downward) price runs last longer than counter-movements for an extended period of time. This pattern results from "trading as usual", which employs "technical analysis" to exploit asset price trends and, in doing so, reinforces the price trends. The recent financial crisis spilled over to the real economy mainly through the simultaneous devaluation of stock, housing and commodity wealth. The severity of these "bear markets" was the result of the long upward climb of prices during the preceding "bull markets." The paper argues that a financial transactions tax would reduce the profitability of short-term trend-chasing in derivatives markets (fundamentals-oriented trading would hardly be affected). By doing so, a transactions tax would limit the magnitude of the "long swings" in asset prices.

Suggested Citation

  • Stephan Schulmeister, 2010. "Boom-Bust Cycles and Trading Practices in Asset Markets, the Real Economy and the Effects of a Financial Transactions Tax," WIFO Working Papers 364, WIFO.
    • Handle: RePEc:wfo:wpaper:y:2010:i:364
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    File URL: https://www.wifo.ac.at/wwa/pubid/38641
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    Citations

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    Cited by:

    1. Wahl, Peter., 2014. "The European civil society campaign on the financial transaction tax," ILO Working Papers 994847673402676, International Labour Organization.
    2. Stephan Schulmeister, 2011. "Implementation of a General Financial Transactions Tax," WIFO Studies, WIFO, number 41992, February.
    3. Helene Schuberth & Stephan Schulmeister, 2011. "Settlement Systems and Financial Transactions Taxes," WIFO Studies, WIFO, number 42610, February.
    4. Catherine Mathieu & Henri Sterdyniak, 2013. "The euro area in crisis," Sciences Po publications info:hdl:2441/2k5dq3ilav9, Sciences Po.
    5. repec:ilo:ilowps:484767 is not listed on IDEAS
    6. Stephan Schulmeister, 2015. "The struggle over the Financial Transactions Tax. A politico-economic farce," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 15-55.
    7. Stephan Schulmeister, 2012. "Technical Trading and Commodity Price Fluctuations," WIFO Studies, WIFO, number 45238, February.
    8. Stephan Schulmeister, 2013. "The European Monetary Fund. A systemic problem needs a systemic solution," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 389-424.
    9. repec:hal:spmain:info:hdl:2441/2k5dq3ilav9qd96i67qs9finig is not listed on IDEAS
    10. Jorge Garcia-Arias & Eduardo Fernandez-Huerga & Ana Salvador, 2013. "European Periphery Crises, International Financial Markets, and Democracy," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(4), pages 826-850, October.

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