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Costs and benefits of financial regulation: Short-selling bans and transaction taxes

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  • Lensberg, Terje
  • Schenk-Hoppé, Klaus Reiner
  • Ladley, Dan

Abstract

We quantify the effects of financial regulation in an equilibrium model with delegated portfolio management. Fund managers trade stocks and bonds in an order-driven market, subject to transaction taxes and constraints on short-selling and leverage. Results are obtained on the equilibrium properties of portfolio choice, trading activity, market quality and price dynamics under the different regulations. We find that these measures are neither as beneficial as some politicians believe nor as damaging as many practitioners fear.

Suggested Citation

  • Lensberg, Terje & Schenk-Hoppé, Klaus Reiner & Ladley, Dan, 2015. "Costs and benefits of financial regulation: Short-selling bans and transaction taxes," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 103-118.
    • Handle: RePEc:eee:jbfina:v:51:y:2015:i:c:p:103-118
    DOI: 10.1016/j.jbankfin.2014.10.014
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    2. Nathalie Oriol & Iryna Veryzhenko, 2019. "Market structure or traders' behavior? A multi agent model to assess flash crash phenomena and their regulation," Quantitative Finance, Taylor & Francis Journals, vol. 19(7), pages 1075-1092, July.
    3. Nathalie Oriol & Iryna Veryzhenko, 2015. "Market structure or traders’ behavior? An assessment of flash crash phenomena and their regulation based on a multi-agent simulation," Working Papers halshs-01254435, HAL.
    4. Lensberg, Terje & Schenk-Hoppé, Klaus Reiner, 2021. "Cold play: Learning across bimatrix games," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 419-441.
    5. Roberto Dieci & Xue-Zhong He, 2018. "Heterogeneous Agent Models in Finance," Research Paper Series 389, Quantitative Finance Research Centre, University of Technology, Sydney.
    6. Thorsten Hens & Terje Lensberg & Klaus Reiner Schenk‐Hoppé, 2018. "Front‐Running and Market Quality: An Evolutionary Perspective on High Frequency Trading," International Review of Finance, International Review of Finance Ltd., vol. 18(4), pages 727-741, December.
    7. Thomas Holtfort, 2019. "From standard to evolutionary finance: a literature survey," Management Review Quarterly, Springer, vol. 69(2), pages 207-232, June.
    8. Ladley, Daniel & Lensberg, Terje & Palczewski, Jan & Schenk-Hoppé, Klaus Reiner, 2015. "Fragmentation and stability of markets," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 466-481.
    9. Ladley, Daniel, 2020. "The high frequency trade off between speed and sophistication," Journal of Economic Dynamics and Control, Elsevier, vol. 116(C).
    10. He, Xue-Zhong & Lin, Shen, 2022. "Reinforcement Learning Equilibrium in Limit Order Markets," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    11. Daniel Ladley, 2019. "The Design and Regulation of High Frequency Traders," Discussion Papers in Economics 19/02, Division of Economics, School of Business, University of Leicester.
    12. Dercole, Fabio & Radi, Davide, 2020. "Does the “uptick rule” stabilize the stock market? Insights from adaptive rational equilibrium dynamics," Chaos, Solitons & Fractals, Elsevier, vol. 130(C).
    13. Ladley, Daniel & Liu, Guanqing & Rockey, James, 2020. "Losing money on the margin," Journal of Economic Behavior & Organization, Elsevier, vol. 172(C), pages 107-136.
    14. MiloÈ™ Marius Cristian & MiloÈ™ Laura Raisa, 2018. "Short-Selling Regulation and the Development of the Stock Markets," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(1), pages 470-475, July.

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    More about this item

    Keywords

    Financial regulation; Portfolio management; Market microstructure;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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