Deng, YonghengLiu, XinWei, Shang-Jin2018-05-230304-405Xhttp://hdl.handle.net/1885/143579We 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.application/pdf© 2018 Elsevier B.Vhttp://creativecommons.org/licenses/by-nc-nd/4.0/Tobin taxTransaction costVolatilitySpeculationLimits to arbitrageOne fundamental and two taxes: when does a Tobin tax reduce financial price volatility?201810.1016/j.jfineco.2018.04.009