Securities Transaction Taxes and Market Quality

Abstract:     
We study changes in market quality variables associated with nine modifications to the New York State Securities Transaction Tax (STT) between 1932 and 1981. We find that when there is an increase in the level of an STT, individual stock volatility increases, bid-ask spreads widen, price impacts are greater, and volume decreases. Our evidence suggests that there is no significant relation between the level of an STT and volatility of portfolios. We examine the propensity of traders to switch trading locations to avoid the tax and find mixed evidence that they will change locations.

Number of Pages in PDF File: 35

Keywords: transaction tax, Tobin tax, market quality, volatility, transfer tax, taxation

JEL Classification: G18, G28, H20

working papers series