Abstract

http://ssrn.com/abstract=906567
 
 

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Transaction Tax and Market Quality of the Taiwan Stock Index Futures


Robin K. Chou


National Chengchi University

George H. K. Wang


George Mason University - Finance Area


Journal of Futures Market, Forthcoming

Abstract:     
On May 1, 2000, the Taiwan government reduced the tax levied on futures transactions on the Taiwan Futures Exchange from 5 to 2.5 basis points. This event provides us with a unique opportunity to test empirically the impact of a tax rate reduction on trading volume, bid-ask spreads, and price volatility. Intraday and daily time series data from May 1, 1999 to April 30, 2001 are tested in a three equation structural model. Our findings show that transaction taxes have a negative impact on trading volume and bid-ask spreads, as we find that trading volume increased and bid-ask spreads decreased in the period following the reduction in the transaction tax. Our analysis is not consistent with the argument that the imposition of a transaction tax may reduce price volatility, since there are no significant changes in price volatility after the tax reduction. We further find that, although the reduction in the transaction tax did reduce tax revenues, the proportional decrease in tax revenues is less than the 50% reduction in the tax rate. Finally, tax revenues in the second and third year after the tax reduction increased, as compared to the year before the tax reduction.

Number of Pages in PDF File: 38

Keywords: Index Futures, Market Quality, Transaction Tax

JEL Classification: G13, G18

Accepted Paper Series


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Date posted: June 6, 2006  

Suggested Citation

Chou, Robin K. and Wang, George H. K., Transaction Tax and Market Quality of the Taiwan Stock Index Futures. Journal of Futures Market, Forthcoming. Available at SSRN: http://ssrn.com/abstract=906567

Contact Information

Robin K. Chou (Contact Author)
National Chengchi University ( email )
No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei, 11623
Taiwan
+886-2-29393091 ext. 81016 (Phone)
George H. K. Wang
George Mason University - Finance Area ( email )
Fairfax, VA 22030
United States
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