One fundamental and two taxes: when does a Tobin tax reduce financial price volatility?
Date
2018
Authors
Deng, Yongheng
Liu, Xin
Wei, Shang-Jin
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Publisher
Elsevier
Abstract
We aim to make two contributions to the literature on the effects of transaction costs on financial price volatility. First, by augmenting a double differencing approach with a research design with three ingredients (a common set of companies simultaneously listed on two stock exchanges, binding capital controls, and different timing of changes in transaction costs), we obtain a control group that has identical corporate fundamentals as the treatment group. We apply the research design to Chinese stocks that are cross-listed in Hong Kong and Mainland China. Second, we allow transaction costs to have different effects in markets with different maturity. We find a significantly negative relationship, on average, between stamp duty increase and price volatility. However, this average effect masks some important heterogeneity. In particular, when institutional investors have become a significant part of the traders’ pool, we find an opposite effect. Overall, our results suggest that a Tobin tax could work in an immature market, but can backfire in a more developed market.
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Keywords
Tobin tax, Transaction cost, Volatility, Speculation, Limits to arbitrage
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Source
Journal of Financial Economics
Type
Journal article
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Access Statement
Open Access
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Restricted until
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