The effect of financial transaction tax on market liquidity and volatility: An Italian perspective

Abstract

This paper investigates the effect of the Financial Transaction Tax announcement, 29 December 2012, and the tax introduction, 1 March 2013, on the liquidity and volatility of the affected Italian stocks. The paper examines two-month windows of daily observations before and after each event. To assess the change in liquidity in pre-and post-event samples, the Mann-Whitney U-test for the equality of medians is employed, while for the assessment of volatility change, we apply the Levene test and its modifications for homogeneity of variances. The paper documents that the announcement of the tax positively affects market liquidity, whereas there is a dramatic decrease in liquidity as a result of tax introduction. It implies that the trading costs of the affected equities decrease after the tax announcement and significantly increase after the tax introduction events. As for volatility, the results mainly indicate no statistically significant changes between the pre-and post-tax announcement and introduction events.

Leverage Effect and Switching of Market Efficiency Post Goods and Services Tax (GST) Imposition

“…Companies with incomplete daily official closing price or annual market capitalisation are excluded from this paper. Accordingly, the daily natural logarithm stock returns as expressed in Equation 1 is computed by using the daily official closing price (Ali, Nassir, Abidin & Talib, 2011;Hvozdyk & Rustanov, 2016). There are two advantages of the natural logarithm stock returns: (1) it conforms to the normality assumption and (2) relating the natural logarithmic stock returns over a relatively longer research period is more manageable (Strong, 1992).…”

“…One joint portfolio comprises of all companies in Bursa Malaysia and ASX respectively, to explore the effect of GST imposition on the changes of market efficiency. Ten size-sorted portfolios are constructed based on market capitalisation to study the moderating role of the size effect to moderate the relationship between the GST imposition on the fee-based financial services with the market efficiency (Hvozdyk & Rustanov, 2016). The decile portfolio with the smallest market capitalisation is indicated as Portfolio 1, while those with the largest market capitalisation is represented by Portfolio 10.…”

“…For that reason, the one joint portfolio constitutes the all-inclusive asymmetric response and structural change of the market efficiency in the stock market. To further analyse the role of the size effect as a moderator, ten size-sorted portfolios are constructed by making use of the weighted adjusted stock returns (Hvozdyk & Rustanov, 2016). α 0 in the GJR-GARCH model is the constant.…”

“…This, in turn, is used for (1) the benefit of the poor, (2) funding the future financial crisis and (3) reducing the sovereign debts (Burman et al, 2016). The FTT advocates stressed that, apart from generating substantial tax revenues to recoup the costs of the financial crisis, FTT imposition may (1) mitigate excessive stock market volatility by curtailing noise investors and abating speculation and (2) enhance the market efficiency (Stiglitz, 1989;Song &Zhang, 2005;Baltagi, Li & Li, 2006;Pomeranets & Weaver, 2011;Capelle-Blancard & Havrylchyk, 2014;Hvozdyk & Rustanov, 2016). However, the FTT opponents dispute that the FTT imposition is like "throwing sands in the wheel of the financial markets" (Tobin, 1978), which results to problems, including, destabilizing the stock market volatility, hinder the stock market efficiency and drop in the stock trading volume (Grundfest & Shoven, 1991;Schwert & Seguin, 1993;Hakkio, 1994;Li, Tang, Shang & Wang, 2013).…”

High-Frequency Trading and its Role in Fragmented Markets

“…This regulation restricts HFTs as they rely on short update intervals using many deletions and modifications. Comparable to the France implementation, this regulation resulted in a decrease in liquidity (Hvozdyk and Rustanov, 2016). Another FTT organized as an enhanced cooperation is to be implemented by ten European countries, e.g., France, Italy and Germany (European Commission, 2016).…”