Some Evidence that a Tobin Tax on Foreign Exchange Transactions May <i>Increase</i> Volatility *

Aliber, Robert Z.; Chowdhry, Bhagwan; Yan, Shu

doi:10.1023/b:eufi.0000022143.77321.20

Cited by 63 publications

(58 citation statements)

References 16 publications

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“…Hence, if the financial market volatility depends on the relative noise component, then an increase in entry costs or transaction taxes may not imply a reduction in the market volatility. 2 Therefore, our findings that a Tobin tax may increase volatility are consistent with the evidence presented in the empirical literature on the relationship between transaction costs and equity market volatility and those given by Aliber, Chowdhry, and Yan (2002).…”

Section: Introductionsupporting

confidence: 88%

Entry cost, the Tobin tax, and noise trading in the foreign exchange market

Shi

2009

Canadian J of Economics

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Two types of policy have been proposed to eliminate noise trading in the foreign exchange market: increasing the entry cost or imposing a 'Tobin tax' type of transaction tax. In this paper, we endogenize entry decisions of both informed traders and noise traders and show that these policies may be ineffective in reducing exchange rate volatility. This is because these policies will discourage the entry of all traders, so they may not change the relative ratio of traders, or they may affect informed traders disproportionately more, which increases the relative ratio of noise traders and exchange rate volatility. JEL classification: F3, G1Coûtà l'entrée, taxe de Tobin et bruit transactionnel qui empêche le prix d'être parfaitement révélateur dans le marché des changes. Deux types de politiques ontété proposées pouŕ eliminer le bruit transactionnel qui empêche le prix d'être parfaitement révélateur dans le marché des changes : accroître le coûtà l'entrée ou imposer une taxeà la Tobin sur les transactions. Dans ce texte, on endogénise les décisionsà l'entréeà la fois des opérateurs informés et des autres qui n'ont pas d'information significative, et on montre que ces politiques sont ineffectives pour réduire la volatilité du taux de change. C'est que ces politiques découragent l'entrée de tous les opérateurs. En conséquence, elles peuvent ne pas changer le ratio des deux types d'opérateurs, ou peuvent même affecter les opérateurs informés davantage -ce qui accroît l'importance relative des moins informés et donc la volatilité du taux de change.

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Section: Introductionsupporting

confidence: 88%

Entry cost, the Tobin tax, and noise trading in the foreign exchange market

Shi

2009

Canadian J of Economics

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“…In one of the earliest empirical contributions Umlauf (1993) reports an increase of price volatility after Sweden introduced a round trip tax on equity transactions in 1984. 3 Aliber et al (2003) empirically investigate the impact of the size of transaction costs on volatility and show that higher transaction costs are associated with higher volatility. More recently, contributions by Ehrenstein (2002), Westerhoff (2003) and Ehrenstein et al (2005) provide evidence that an FTT drives chartists from the taxed market and hence stabilises prices.…”

mentioning

confidence: 99%

MarketversusResidence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax

Huber

Kirchler

Kleinlercher

et al. 2017

The Economic Journal

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The effects of a financial transaction tax (FTT) are scientifically disputed, as seemingly small details of its implementation may matter a lot. In this article, we provide experimental evidence on the different effects of an FTT, depending on whether it is implemented as a tax on markets, on residents, or a combination of both. We find that a tax on markets has negative effects on volatility and trading volume, whereas a tax on residents shows none of these undesired effects. Additionally, we observe that individual risk attitude is not related to traders’ reaction to the different forms of an FTT.

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“…Hence, an increase of 0.02% in transaction costs following the introduction of a tax leads to an increase in volatility of 0.5 percentage points. Nonetheless, this study by Aliber et al (2003) suffers from three shortcomings. First, they used aggregated futures data, whereas Hartmann (1998aHartmann ( ,b, 1999 has shown that there is no link between spots and futures in the foreign exchange market.…”

Section: Existing Empirical Studiesmentioning

confidence: 98%

“…Other empirical studies related to the stock market lead to similar results (Hau, 2006) for instance, in the case of the French stock market). Aliber et al (2003) used futures data obtained from datastream from 1 January 1977 to 31 December 1999. The dataset consists of daily prices per unit of four major currencies in the US dollar: the British pound, the German mark, the Japanese yen and the Swiss franc.…”

Section: Existing Empirical Studiesmentioning

confidence: 99%

Tobin Tax and Volatility: A Threshold Quantile Autoregressive Regression Framework

Damette

Park

2015

Rev International Economics

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From an original data set on the euro-dollar and on the won-dollar currency pairs (2008-2010), we conduct a threshold quantile autoregressive model to explain the role of a Tobin tax (TT) on the exchange rate volatility, taking into account two types of nonlinearity (regimes and quantiles). We find evidence that the impact of a TT would not be monotonic. A TT may be a good instrument to stabilize foreign exchange volatility only in normal times and/or in efficient markets. In contrast, a TT could be counterproductive in turbulent periods by increasing the volatility. In addition, by comparing a major currency pair (euro/dollar) and a minor currency pair (won/dollar), it appears that the potential stabilizing effect of a TT would be more clear-cut in the low volatility regime of a major currency pair, similar to the euro/dollar. Our results do not corroborate the previous studies that derived a monotonic and positive impact of a TT on volatility.

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Some Evidence that a Tobin Tax on Foreign Exchange Transactions May Increase Volatility *

Cited by 63 publications

References 16 publications

Entry cost, the Tobin tax, and noise trading in the foreign exchange market

Entry cost, the Tobin tax, and noise trading in the foreign exchange market

MarketversusResidence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax

Tobin Tax and Volatility: A Threshold Quantile Autoregressive Regression Framework

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