Some effects of transaction taxes under different microstructures

Authored by Frank Westerhoff, Paolo Pellizzari

Date Published: 2009-12

DOI: 10.1016/j.jebo.2009.08.010

Sponsors: Italian Ministry for University and Scientific Research

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

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. (C) 2009 Elsevier B.V. All rights reserved.

Tags

Agent-based models Liquidity Tobin tax Microstructures Transaction tax