Might a Securities Transactions Tax Mitigate Excess Volatility? Some Evidence from the Literature

Abstract

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The economic consequences of a Tobin tax—An experimental analysis

“…When the tax is introduced unilaterally on the larger (smaller) of the two markets, volatility decreases (increases). Noting that market size in our experiments is closely linked to liquidity, this result confirms theoretical results by Haberer (2004). Furthermore, it is important to note that a Tobin tax on one market has been found to decrease volatility on the untaxed market, which is mainly caused by a shift in trading volume.…”

“…Taken together, the results in subsections 4.5.2 and 4.5.3 are consistent with a recent model that postulates a U-shaped relationship of volatility and market volume (Haberer, 2004(Haberer, , 2006. While on the highly liquid large market a tax-driven reduction in volume (taken as a rough proxy for liquidity) leads to a decrease in volatility, the opposite effect is observed when a comparatively illiquid small market is taxed, thus driving out liquidity and increasing volatility.…”

Market stability vs. market resilience: Regulatory policies experiments in an agent-based model with low- and high-frequency trading

“…On the other hand, many theoretical works suggest that an FTT can have a stabilizing effect (Ehrenstein, 2002;Westerhoff, 2003Westerhoff, , 2004Westerhoff and Dieci, 2006). 23 However, other theoretical works also point out that such a stabilizing role is highly dependent on some important conditions such as market liquidity (Haberer, 2004), the level of the tax (Giardina and Bouchaud, 2004;Dupont and Lee, 2007;Demary, 2010;Fricke and Lux, 2015), the structure of the market (Pellizzari and Westerhoff, 2009). Lastly, many scholars view HFT as the main providers of liquidity in modern markets (Hendershott, Jones, and Menkveld, 2011;Menkveld, 2013).…”

A General Financial Transaction Tax Motives, Revenues, Feasibility and Effects

“…In this "world" all actors are fully rational and use the same information set and the same "true" model, but do not know the expectations of other participants (Haberer, 2004). For that reason and also because transactions are costly (Habermeier -Kirilenko, 2003) prices cannot jump instantaneously to a new equilibrium but follow a gradual path through a series of transactions.…”

“…If prices move smoothly from one fundamental equilibrium to the next, and if this process takes some time due to learning the expectations of other actors as well as due to transaction costs, then profit-seeking actors will attempt to exploit the related persistence of price movements. The use of trend-following trading strategies will in turn increase the momentum of price movements which will then hardly stop exactly at the new fundamental equilibrium (for theoretical as well as computational models dealing with the interaction of heterogeneous actors see DeLong et al, 1990A and1990B;Frenkel -Froot, 1990;De Grauwe -Grimaldi, 2006;Hommes, 2006;Frydman -Goldberg, 2007; this issue is investigated in the context of transaction taxes by Kupiec, 1996;Westerhoff, 2003;Haberer, 2004;Song -Zhang, 2005). Table 1 summarizes the main features of the three different "worlds" of financial markets ("world 0" is also covered since -though unrealistic -it serves as benchmark model in asset pricing theory).…”