Transaction Taxes and Traders with Heterogeneous Investment Horizons in an Agent-Based Financial Market Model

34 Pages Posted: 18 Dec 2010

Date Written: November 10, 2009


This heterogeneous interacting agents model of a financial market is a generalization of the model proposed by Westerhoff (The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies) by traders who are allowed to have different investment horizons as introduced by Demary (Who Does a Currency Transaction Tax Harm More: Short-term Speculators or Long-term Investors?). Our research goals are, first, to study what consequences the introduction of heterogeneous investment horizons has for agent-based financial market models and second, how effective transaction taxes are in stabilizing financial markets. In detail, we are interested in how the popularity of different trading rules and investment horizons change due to taxation and how emergent properties from the interaction of traders like bubbles and crashes, excess volatility, excess kurtosis and volatility clustering change. Numerical simulations reveal that under taxation traders abstain from short-term trading in favour of longer investment horizons. This change in behavior leads to less excess volatility and diminishing volatility clusters for small tax rates. When the tax rate exceeds a certain threshold, excess volatility and misalignments increase as also found in Westerhoff (Heterogeneous Traders and the Tobin Tax). The reason is, that the longer term fundamentalist trading rule becomes unpopular in favor of the longer term trend-chasing rule.

Keywords: Financial Market Stability, Heterogeneous Interacting Agents Model, Speculative Bubbles, Stylized Facts, Technical and Fundamental Analysis, Transaction Taxes

JEL Classification: C15, D84, G01, G15, G18

Suggested Citation

Campanella, Edoardo, Transaction Taxes and Traders with Heterogeneous Investment Horizons in an Agent-Based Financial Market Model (November 10, 2009). Economics Discussion Paper No. 2009-47. Available at SSRN: or

Edoardo Campanella (Contact Author)

World Trade Organization (WTO) ( email )

Rue de Lausanne 154
Geneva 21, CH-1211

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