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Sand in the Wheels or Wheels in the Sand? Tobin Taxes and Market Crashes

Hynek Lavicka, Tomáš Lichard and Jan Novotny ()

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: The recent 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 FTTs may increase the variance while decreasing the impact of price jumps. This result implies that regulators may face a trade-off between overall variance and price jumps when designing optimal tax. However, the results are not robust to the size of the artificial market as non-linearities emerge when the size of the market is increased.

Keywords: price jumps; financial transaction taxes; agent-based modeling; Monte Carlo; volatility (search for similar items in EconPapers)
JEL-codes: C15 C16 C61 G17 G18 H23 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-cmp, nep-mst and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Journal Article: Sand in the wheels or wheels in the sand? Tobin taxes and market crashes (2016) Downloads
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