Transaction taxes and traders with heterogeneous investment horizons in an agent-based financial market model

Markus Demary

Economics - The Open-Access, Open-Assessment E-Journal, 2010, vol. 4, issue 8, pages 1-44

Abstract: This agent-based financial market model is a generalization of the model of Westerhoff (The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies) by traders who are allowed to have different investment horizons as introduced by Demary (Who Does a Currency Transaction Tax Harm More: Short-Term Speculators or Long-Term Investors?). Our research goals are, first, to study what consequences the introduction of heterogeneous investment horizons has for agent-based financial market models, and second, how effective transaction taxes are in stabilizing financial markets. Numerical simulations reveal that under sufficiently small tax rates traders abstain from short-term trading in favour of longer investment horizons. This change in behavior leads to less volatility and less mispricings. When the tax rate exceeds a certain threshold, however, mispricings increase as also found in Westerhoff (Heterogeneous Traders and the Tobin Tax and The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies). This emergent property is due to the fact that taxation reduces short-term fluctuations and causes longer lasting trends in the exchange rate. As a result, the longer term fundamentalist trading rule becomes unpopular in favor of the longer term trend-chasing rule. --

Keywords: Agent-based models; financial market stability; regulation of financial Markets; technical and fundamental analysis; transaction taxes (search for similar items in EconPapers)
JEL-codes: C15 D84 G01 G15 G18 (search for similar items in EconPapers)
Date: 2010
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Working Paper: Transaction taxes and traders with heterogeneous investment horizons in an agent-based financial market model / (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:zbw:ifweej:20108

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