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Sand in the wheels or wheels in the sand? Tobin taxes and market crashes

H. Lavička, Tomáš Lichard and J. Novotný

International Review of Financial Analysis, 2016, vol. 47, issue C, 328-342

Abstract: The recent economic crisis revived interest in financial transaction taxes (FTTs) as a means to offset negative risk externalities. However, up-to-date academic research does not provide sufficient insights into the effects of transaction taxes on financial markets as the literature has here-to-fore been focused too narrowly on Gaussian variance as a measure of volatility. In this paper, we argue that it is imperative to understand the relationship between price jumps, Gaussian variance, and FTTs. While Gaussian variance is not necessarily a problem in itself, the non-normality of return distribution caused by price jumps affects not only the performance of many risk-hedging algorithms but directly influences the frequency of catastrophic market events. To study the aforementioned relationship, we use an agent-based model of financial markets. Its results show that the relationship between FTTs and price jumps is intricate. This result implies that regulators may face a trade-off between overall variance and price jumps when designing optimal tax.

Keywords: Price jumps; Financial transaction taxes; Agent-based modeling; Monte Carlo; Volatility (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Working Paper: Sand in the Wheels or Wheels in the Sand? Tobin Taxes and Market Crashes (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:47:y:2016:i:c:p:328-342

DOI: 10.1016/j.irfa.2016.03.012

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