Can a Financial Transaction Tax Prevent Stock Price Booms?

Albert Marcet, Klaus Adam, Johannes Beutel and Sebastian Merkel

No 10727, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a stock market model that quantitatively replicates the joint behavior of stock prices, trading volume and investor expectations. Stock prices in the model occasionally display belief-driven boom and bust cycles that delink asset prices from fundamentals and redistribute considerable amounts of wealth from less to more experienced investors. Although gains from trade arise only from subjective belief differences, introducing financial transactions taxes (FTTs) remains undesirable. While FTTs reduce the size and length of boom-bust cycles, they increase the likelihood of such cycles, therby overall return volatility and wealth redistribution. Contingent FTTs, which are levied only above a certain price threshold, give rise to problems of equilibrium multiplicity and non-existence.

Keywords: Asset price booms; Financial transactions tax; Tobin tax (search for similar items in EconPapers)
JEL-codes: D84 G12 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Can a financial transaction tax prevent stock price booms? (2015)
Working Paper: Can a Financial Transaction Tax Prevent Stock Price Booms? (2015)
Working Paper: Can a financial transaction tax prevent stock price booms? (2015)
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