Securities Transaction Tax and Stock Market Behavior in an Agent-based Financial Market Model

AbstractAs highly related to the investors’ earnings expectations and trading decision-making behavior, securities transaction tax (STT) has long been regarded as a typical regulatory mechanism exploited by policy makers. However, neither theoretical analysis nor empirical studies reach consensus about the role and policy effect of the securities transaction tax. Within the framework of agent-based computational finance, this paper presents a new artificial stock market model with heterogeneous agents, which allows us to assess the impacts of varying STTs on market behavior to come to robust conclusions. First we investigate the dynamics of benchmark market with no tax levied, and then market behaviors with different STTs are thoroughly checked. The results show that a modest transactions tax does contribute to stabilize markets by reducing market volatility, but its negative effects on market efficiency cannot be ignored at the same time. The findings suggest that regulatory authorities should introduce STT discreetly to strike a balance between stability and efficiency

The Tobin Tax A Review of the Evidence

The debate about the Tobin Tax, and other financial transaction taxes (FTT), gives rise to strong views both for and against. Unfortunately, little of this debate is based on the now considerable body of evidence about the impact of such taxes. This review attempts to synthesise what we know from the available theoretical and empirical literature about the impact of FTTs on volatility in financial markets. We also review the literature on how a Tobin Tax might be implemented, the amount of revenue that it might realistically produce, and the likely incidence of the tax. We conclude that, contrary to what is often assumed, a Tobin Tax is feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions. However, it would be unlikely to reduce market volatility and could even increase it.Tobin tax, financial transaction taxes, volatility, revenue, incidence, feasibility

The changing nature of debt and equity; a financial perspective

Debt ; Securities ; Corporations - Finance

Transact taxes in a price maker/taker market

We develop a price maker/taker model to study how a financial transaction tax affects markets. We find taxes widen quoted and effective spreads by more than twice the tax. Taxes increase volatility slightly (without intermediation) to significantly (with intermediation). High taxes may halve volumes and gains from trade while doubling search costs. Measures of market quality are more affected by taxes in markets with intermediaries. Investors and intermediaries competing for liquidity can triple search costs and increase quoted spreads while decreasing effective spreads. We also find revenue-optimal rates of 60-75 bp. Our results are particularly relevant to markets with high-frequency trading or thin depth

Financial transaction tax: review and assessment

We explore whether a Financial Transactions Tax (FTT) is likely to correct the market failures that have contributed to the financial crisis, to what extent FTT succeeds in raising revenues, and how the FTT compares to alternative taxes in terms of efficiency. We�find little evidence that the FTT will be effective in correcting�market failures. Taxing of transactions is not well targeted at�behaviour that leads to excessive risk and systemic risk creation. The empirical evidence does not suggest that the introduction of an FTT�reduces volatility or asset price bubbles. An FTT will likely raise�significant revenues and we estimate those revenues for the�Netherlands. In the short term, the incidence of the tax will be�chiefly on the current holders of securities. Ultimately, the tax will�be borne in part by end users, and we estimate the likely effects on�economic growth. When compared to alternative forms of taxation of the�financial sector, the FTT is likely less e� fficient given the amount�of revenues. In particular, taxes that more directly address existing�distortions, such as the current VAT exemption for banks, and the bias�towards debt financing, provide more efficient alternatives. �

Liquidity and Asset Prices

We review the theories on how liquidity affects the required returns of capital assets and the empirical studies that test these theories. The theory predicts that both the level of liquidity and liquidity risk are priced, and empirical studies find the effects of liquidity on asset prices to be statistically significant and economically important, controlling for traditional risk measures and asset characteristics. Liquidity-based asset pricing empirically helps explain (1) the cross-section of stock returns, (2) how a reduction in stock liquidity result in a reduction in stock prices and an increase in expected stock returns, (3) the yield differential between on- and off-the-run Treasuries, (4) the yield spreads on corporate bonds, (5) the returns on hedge funds, (6) the valuation of closed-end funds, and (7) the low price of certain hard-to-trade securities relative to more liquid counterparts with identical cash flows, such as restricted stocks or illiquid derivatives. Liquidity can thus play a role in resolving a number of asset pricing puzzles such as the small-firm effect, the equity premium puzzle, and the risk-free rate puzzle.Liquidity; Liquidity Risk; Asset Prices

Limited financial market participation: a transaction cost-based explanation

This paper focuses on the issue of limited financial market participation and determines a lower bound on the level of fixed transaction costs that are required to reconcile observed portfolio choices with asset returns within an isoelastic utility framework. The bound is determined from the set of conditions that ensure the optimality of consumption behavior by financial market non-participants. It represents the lowest possible cost rationalizing observed non-participation choices by providing a measure of the forgone utility gains from participation for observed non-participants. Such gains are related both to the magnitude of financial market returns and to the opportunity of smoothing consumption, with the benefits of the former decreasing in the degree of relative risk aversion and those of the latter increasing in it. Using the US Consumer Expenditure Survey, I find that a yearly cost of at least 70 is needed to rationalize non-participation for a consumer with log utility and who can trade in the S&P500 CI. This lower bound declines rapidly in risk aversion for levels of risk aversion up to two/three; for higher values, it levels off. A yearly cost of at least 31 is needed to rationalize non-participation for a consumer with log utility and who can trade in US Treasury Bills. This lower bound rises steadily in risk aversion

Financial transactions tax : panacea, threat, or damp squib ?

Attempts to raise a significant percentage of gross domestic product in revenue from a broad-based financial transactions tax are likely to fail both by raising much less revenue than expected and by generating far-reaching changes in economic behavior. Although the side-effects would include a sizable restructuring of financial sector activity, this would not occur in ways corrective of the particular forms of financial overtrading that were most conspicuous in contributing to the crisis.Debt Markets,Emerging Markets,Taxation&Subsidies,Banks&Banking Reform,Economic Theory&Research