Financial Transaction Taxes, Market Composition, and Liquidity

94 Pages Posted: 12 Feb 2013 Last revised: 1 Nov 2016

See all articles by Jean-Edouard Colliard

Jean-Edouard Colliard

HEC Paris - Finance Department

Peter Hoffmann

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: October 14, 2016

Abstract

We use the introduction of a fi nancial transaction tax (FTT) in France in 2012 to test competing theories on its impact. We find no support for the idea that an FTT improves market quality by a ffecting the composition of trading volume. Instead, our results are in line with the hypothesis that a lower trading volume reduces liquidity, and thereby market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short-term to long-term investors. Finally, our fi ndings show that moderate aggregate e ffects on market quality can mask large adjustments made by individual agents.

Keywords: Financial transaction tax, institutional trading, liquidity, high-frequency trading

JEL Classification: G10, G14, G18, H32

Suggested Citation

Colliard, Jean-Edouard and Hoffmann, Peter, Financial Transaction Taxes, Market Composition, and Liquidity (October 14, 2016). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2215788 or http://dx.doi.org/10.2139/ssrn.2215788

Jean-Edouard Colliard

HEC Paris - Finance Department ( email )

France

Peter Hoffmann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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