Some Effects of Transaction Taxes Under Different Microstructures

Paolo Pelizzari and Frank Westerhoff ()
Authors registered in the RePEc Author Service: Paolo Pellizzari ()

No 212, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We show that the effectiveness of transaction taxes depends on the market microstructure. Within our model, heterogeneous traders use a blend of technical and fundamental trading strategies to determine their orders. In addition, they may turn inactive if the profitability of trading decreases. We find that in a continuous double auction market the imposition of a transaction tax is not likely to stabilize financial markets since a reduction in market liquidity amplifies the average price impact of a given order. In a dealership market, however, abundant liquidity is provided by specialists and thus a transaction tax may reduce volatility by crowding out speculative orders.

Keywords: transaction tax; Tobin tax; microstructures; agent-based models; liquidity (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-mst
Date: 2007-12-01
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Working Paper: Some effects of transaction taxes under different microstructures (2009)
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