Using an artificial financial market for assessing the impact of Tobin-like transaction taxes

Abstract

The Tobin tax is a solution proposed by many economists for limiting the speculation in foreign exchange and stock markets and for making these markets stabler. In this paper we present a study on the effects of a transaction tax on one and on two related markets, using an artificial financial market based on heterogeneous agents. The microstructure of the market is composed of four kinds of traders: random traders, fundamentalists, momentum traders and contrarians, and the resources allocated to them are limited. In each market it is possible to levy a transaction tax. In the case of two markets, each trader can choose in which market to trade, and an attraction function is defined that drives their choice based on perceived profitability. We performed extensive simulations and found that the tax actually increases volatility and decreases trading volumes. These findings are discussed in the paper

Securities Transaction Tax and Market Quality – the Case of France

“…Within a two-markets setting, where only one market is obliged to a STT, they find volumes on the taxed market declining while volatility simultaneously increases. On the same basis -also a two-markets setting- Hanke, Huber, Kirchler, and Sutter (2010) analyze the effect of a STT, and report in line with Mannaro et al (2008) a decline of the volume on the taxed market which is caused by a shift towards the untaxed one. They conclude that changes on volatility depend on availability of tax heavens and the market size, however, a decrease in short-term speculation could be observed on the taxed market as well.…”

“…He states further, that volatility rises if the risk aversion of traders ascends. Also with different traders types but in a two market-setting Mannaro, Marchesi, and Setzu (2008) assessed the STT. They find an increase of volatility in a single-market setting when chartists are present.…”

Unemployment Benefits and Financial Leverage in an Agent Based Macroeconomic Model

“…Indeed, when we consider that the economy is a complex system in which aggregate regularities (from meso to macro) emerge from the decentralized interaction of a multitude of autonomous agents, Heterogeneous Interacting Agents (HIA) constitutes an effective alternative to the Representative Agent (RA) hypothesis, which is instead the typical assumption made by mainstream macroeconomics (Stiglitz and Gallegati, 2011). Various authors proposed an agent based approach to the study of complex (macro)economic dynamics; just to make a few examples: Ashraf (Russo et al, 2007), the combination of Keynesian management of aggregate demand and Schumpeterian policies aimed at promoting technological progress (Dosi et al, 2010), the interplay between income distribution and economic policies , monetary and fiscal policies (Haber, 2008), the effectiveness of various stabilization policies (Westerhoff and Franke, 2012), labor market policies (Neugart, 2008), the role of regulatory policies on financial markets (Westerhoff, 2008), the effects of introducing a Tobin-like tax (Westerhoff and Dieci, 2006;Mannaro et al 2008;), and so on. Hence, agent based models represent an alternative formulation of microfoundations suited for a complex macroeconomic system and this different approach may have important implications for policy advice (Dawid and Neugart, 2011).…”

On the scientific status of economic policy: a tale of alternative paradigms

“…Therefore, although at the aggregate level the unemployment rate decreases, at the individual level this labor market policy may harm workers who do not receive government transfers 14 . Mannaro, Marchesi, and Setzu (2008) look instead to financial markets and develop an ABM populated by behaviorally-heterogeneous traders with limited resources. They challenge the idea that a Tobin tax is able to stabilize foreign exchange and stock markets, and to reduce speculation.…”