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Tobin tax and market depth

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  • G. Ehrenstein
  • F. Westerhoff
  • D. Stauffer

Abstract

This paper investigates—on the basis of the Cont-Bouchaud model—whether a Tobin tax can stabilize foreign exchange markets. Compared to earlier multi-agent studies, this paper explicitly recognizes that a transaction tax-induced reduction in market depth may increase the price responsiveness of a given order. We find that the imposition of a transaction tax may still achieve a triple dividend: (1) exchange rate fluctuations decrease, (2) currencies are less mispriced and (3) central authorities raise substantial tax revenues. However, if the price impact function is too sensitive with respect to market depth, stabilization may turn into destabilization.

Suggested Citation

  • G. Ehrenstein & F. Westerhoff & D. Stauffer, 2005. "Tobin tax and market depth," Quantitative Finance, Taylor & Francis Journals, vol. 5(2), pages 213-218.
    • Handle: RePEc:taf:quantf:v:5:y:2005:i:2:p:213-218
    DOI: 10.1080/14697680500041064
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