TY - JOUR
T1 - One fundamental and two taxes
T2 - When does a Tobin tax reduce financial price volatility?
AU - Deng, Yongheng
AU - Liu, Xin
AU - Wei, Shang Jin
N1 - Publisher Copyright:
© 2018 Elsevier B.V.
PY - 2018/12
Y1 - 2018/12
N2 - We aim to make two contributions to the literature on the effects of transaction costs on financial price volatility. First, by augmenting a double differencing approach with a research design with three ingredients (a common set of companies simultaneously listed on two stock exchanges, binding capital controls, and different timing of changes in transaction costs), we obtain a control group that has identical corporate fundamentals as the treatment group. We apply the research design to Chinese stocks that are cross-listed in Hong Kong and Mainland China. Second, we allow transaction costs to have different effects in markets with different maturity. We find a significantly negative relationship, on average, between stamp duty increase and price volatility. However, this average effect masks some important heterogeneity. In particular, when institutional investors have become a significant part of the traders’ pool, we find an opposite effect. Overall, our results suggest that a Tobin tax could work in an immature market, but can backfire in a more developed market.
AB - We aim to make two contributions to the literature on the effects of transaction costs on financial price volatility. First, by augmenting a double differencing approach with a research design with three ingredients (a common set of companies simultaneously listed on two stock exchanges, binding capital controls, and different timing of changes in transaction costs), we obtain a control group that has identical corporate fundamentals as the treatment group. We apply the research design to Chinese stocks that are cross-listed in Hong Kong and Mainland China. Second, we allow transaction costs to have different effects in markets with different maturity. We find a significantly negative relationship, on average, between stamp duty increase and price volatility. However, this average effect masks some important heterogeneity. In particular, when institutional investors have become a significant part of the traders’ pool, we find an opposite effect. Overall, our results suggest that a Tobin tax could work in an immature market, but can backfire in a more developed market.
KW - Limits to arbitrage
KW - Speculation
KW - Tobin tax
KW - Transaction cost
KW - Volatility
UR - http://www.scopus.com/inward/record.url?scp=85047056357&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2018.04.009
DO - 10.1016/j.jfineco.2018.04.009
M3 - Article
SN - 0304-405X
VL - 130
SP - 663
EP - 692
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 3
ER -