The Effects of Stamp Duty on the Level and Volatility of Equity Prices

Abstract:     
This paper investigates the effects of stamp duty -the UK securities transaction tax - on the level and volatility of equity prices. The authors examine the response of the equity market to announcements of changes in stamp duty rates and compare the prices of two assets which are similar in all respects apart from their treatment for stamp duty purposes: American Depositary Receipts (ADRs) and their London Stock Exchange-traded stocks. The findings are consistent with the hypothesis that stamp duty is capitalised in prices. Using univariate GARCH models, the authors find that stamp duty has no effect on volatility, contradicting the key hypothesis put
forward by proponents of transaction taxes.

Number of Pages in PDF File: 41

JEL Classification: G12

working papers series