Sand in the wheels or wheels in the sand? Tobin taxes and market crashes

Authored by H Lavicka, T Lichard, J Novotny

Date Published: 2016

DOI: 10.1016/j.irfa.2016.03.012

Sponsors: GACR

Platforms: C++ Zarja

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

The recent economic crisis revived interest in financial transaction taxes (FTTs) as a means to offset negative risk externalities. However, up-to-date academic research does not provide sufficient insights into the effects of transaction taxes on financial markets as the literature has here-to-fore been focused too narrowly on Gaussian variance as a measure of volatility. In this paper, we argue that it is imperative to understand the relationship between price jumps, Gaussian variance, and FTTs. While Gaussian variance is not necessarily a problem in itself, the non-normality of return distribution caused by price jumps affects not only the performance of many risk-hedging algorithms but directly influences the frequency of catastrophic market events. To study the aforementioned relationship, we use an agent-based model of financial markets. Its results show that the relationship between FTTs and price jumps is intricate. This result implies that regulators may face a trade-off between overall variance and price jumps when designing optimal tax. (C) 2016 Elsevier Inc. All rights reserved.

Tags

Risk transaction taxes Financial-markets