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Tobin Tax and Volatility: A Threshold Quantile Autoregressive Regression Framework

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  • Olivier Damette
  • Beum-Jo Park

Abstract

From an original data set on the euro–dollar and on the won–dollar currency pairs (2008–2010), we conduct a threshold quantile autoregressive model to explain the role of a Tobin tax (TT) on the exchange rate volatility, taking into account two types of nonlinearity (regimes and quantiles). We find evidence that the impact of a TT would not be monotonic. A TT may be a good instrument to stabilize foreign exchange volatility only in normal times and/or in efficient markets. In contrast, a TT could be counterproductive in turbulent periods by increasing the volatility. In addition, by comparing a major currency pair (euro/dollar) and a minor currency pair (won/dollar), it appears that the potential stabilizing effect of a TT would be more clear-cut in the low volatility regime of a major currency pair, similar to the euro/dollar. Our results do not corroborate the previous studies that derived a monotonic and positive impact of a TT on volatility.

Suggested Citation

  • Olivier Damette & Beum-Jo Park, 2015. "Tobin Tax and Volatility: A Threshold Quantile Autoregressive Regression Framework," Review of International Economics, Wiley Blackwell, vol. 23(5), pages 996-1022, November.
    • Handle: RePEc:bla:reviec:v:23:y:2015:i:5:p:996-1022
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    File URL: http://hdl.handle.net/10.1111/roie.12193
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