Transaction tax and market volatility: Evidence from the Taiwan futures market

Yung-Shi Liau, Yi-Chen Wu and Hsinan Hsu

Journal of Applied Finance & Banking, 2012, vol. 2, issue 2, 3

Abstract: This paper employs an asymmetric component generalized autoregressive conditional heteroskedasticity (AC-GARCH) model to test the relation between securities transaction tax (STT) and market volatility. Proponents of an STT argue that such a tax will reduce market volatility by discouraging the trading activity of destabilizing short-term traders. In contrast, Song and Zhang (2005) hypothesize that in the markets with relatively higher volatility and larger noise trader participation, an increase in STT will lead to an increase in market volatility. This paper uses daily data on TAIEX futures to test the Song and Zhang (2005) hypothesis. The results reveal that the volatility in high tax periods is larger than that in low tax periods, especially for the part of short-term volatility.

Date: 2012
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