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Some effects of transaction taxes under different microstructures

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  • Pellizzari, Paolo
  • Westerhoff, Frank

Abstract

We show that the effectiveness of transaction taxes depends on the market microstructure. Within our model, heterogeneous traders use a blend of technical and fundamental trading strategies to determine their orders. In addition, they may become inactive if the profitability of trading decreases. We find that in a continuous double auction market the imposition of a transaction tax is not likely to stabilize financial markets since a reduction in market liquidity amplifies the average price impact of a given order. In a dealership market, however, abundant liquidity is provided by specialists, and thus a transaction tax may reduce volatility by crowding out speculative orders.

Suggested Citation

  • Pellizzari, Paolo & Westerhoff, Frank, 2009. "Some effects of transaction taxes under different microstructures," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 850-863, December.
    • Handle: RePEc:eee:jeborg:v:72:y:2009:i:3:p:850-863
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    More about this item

    Keywords

    Transaction tax Tobin tax Microstructures Agent-based models Liquidity;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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