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Proponents of a securities transactions tax have suggested that such a tax may reduce stock return volatility. The argument is that, to the extent that short-term speculative tradingvolume is the source of excess volatility, a tax that reduces such volume will reduce volatility. In the context of a simple general equilibrium model, it is shown that this partial equilibrium argument is misleading and in large part incorrect. In the absence of a tax, the model generates equilibria in which the risky asset's price exhibits excess volatility and agents engage in excess trading activity owing to the presence of destabilizing noise traders. Within the context of the model, it is shown that, although a transactions tax can reduce the volatility of the risky asset's price, the reduction in price volatility is accompanied by a fall in the asset's price as agents discount the future tax liability associated with risky asset ownership. Consequently, although price volatility may decrease slightly, the fall in equilibrium prices more than compensates, and the volatiltiy of risky asset returns unambiguously increases with the level of the transactions tax.Proponents of a securities transactions tax (STT) have suggested that such a tax may reduce stock return volatility by reducing short-term destabilizing trading volume.1 The argument is that, because the impact of the tax is greater for short horizon investments, a tax will make short-term speculative trading strategies unprofitable. If these short-term trading strategies are the source of destabilizing volume and the cause of excess volatility, then a tax that reduces this excess volume will reduce stock return volatility as well.Although the simplicity of the partial equilibrium argument has appeal, it is misleading and in large part incorrect. A tax that discourages the activity of destabilizing traders also discourages rational traders from trading. As the trades of rational traders have a stabilizing influence on prices, the net effect of the tax on volatility is unclear. Moreover, in a general equilibrium, asset values fall by the present value of the expected transactions tax liability. If the tax is to successfully eliminate excess trading volume, the tax must also alter relative asset prices that are the source of excess trading, or the exploitable relative price differentials will persist at the lower cum tax equilibrium prices. As the tax discourages both rational agents and destabilizing speculators from trading, the partial equilibrium argument alone does not explain how a transaction taxwill alter relative prices in the post tax equilibrium.The imposition of an STY may have effects on both the price and return volatility of traded financial assets. It is possible that an STT could lower an asset's price volatility and simultaneously increase the asset's return volatility. Such an outcome will result if the fall The conclusions herein are those of the author and do not represent the views of the Federal Reserve Board or any of the Federal Reserve Banks.