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The effectiveness of Keynes-Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach

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  • Westerhoff, Frank H.
  • Dieci, Roberto

Abstract

We develop a model in which boundedly rational agents apply technical and fundamental analysis to identify trading signals in two different speculative markets. Whether an agent trades and, if so, in which market with which strategy depends on profit considerations. As it turns out, an ongoing evolutionary competition between the trading strategies causes complex price dynamics which closely resembles the behavior of actual speculative prices. Moreover, we find that if the agents have to pay a transaction tax in one market, price variability decreases in this market but increases in the other market. However, the imposition of a uniform tax on all transactions stabilizes both markets. Our results suggest that if regulators of a market introduce a transaction tax, other markets are likely to follow
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  • Westerhoff, Frank H. & Dieci, Roberto, 2006. "The effectiveness of Keynes-Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach," Journal of Economic Dynamics and Control, Elsevier, vol. 30(2), pages 293-322, February.
    • Handle: RePEc:eee:dyncon:v:30:y:2006:i:2:p:293-322
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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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