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Financial transaction taxes, market composition, and liquidity

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  • Hoffmann, Peter
  • Colliard, Jean-Edouard

Abstract

We use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on its impact. We find no support for the idea that an FTT improves market quality by affecting the composition of trading volume. Instead, our results are in line with the hypothesis that a lower trading volume reduces liquidity, and thereby market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short-term to long-term investors. Finally, our findings show that moderate aggregate effects on market quality can mask large adjustments made by individual agents. JEL Classification: G10, G14, G18, H32

Suggested Citation

  • Hoffmann, Peter & Colliard, Jean-Edouard, 2017. "Financial transaction taxes, market composition, and liquidity," Working Paper Series 2030, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20172030
    Note: 1137913
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    References listed on IDEAS

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    1. Capelle-Blancard, Gunther & Havrylchyk, Olena, 2016. "The impact of the French securities transaction tax on market liquidity and volatility," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 166-178.
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    More about this item

    Keywords

    financial transaction tax; high-frequency trading; institutional trading; liquidity;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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