Securities Transaction Tax and Market Volatility

Authors: Song, Frank M.; Zhang, Junxi

Source: The Economic Journal, Volume 115, Number 506, October 2005 , pp. 1103-1120(18)

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Abstract:

One well-known regulatory mechanism in securities markets is the use of a securities transaction tax (STT). The conventional wisdom suggests that increases in an STT reduce market volatility by discouraging the trading activity of destabilising short-term traders. A contrary view argues that STT may well increase market volatility due to the reduction in market liquidity. This article rationalises both views in a general equilibrium framework with noise trading. With fundamental risk and supply risk the model is able to document both the conventional wisdom and the contrarian view. We also discuss special cases where there is only fundamental risk or supply risk.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1468-0297.2005.01034.x

Affiliations: 1: University of Hong Kong

Publication date: 2005-10-01