Costs and Benefits of Financial Regulation: Short-Selling Bans and Transaction Taxes

57 Pages Posted: 14 Aug 2012 Last revised: 1 Nov 2014

Terje Lensberg

Norwegian School of Economics (NHH) - Department of Finance

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

Daniel Ladley

University of Leicester - Department of Economics; University of Leicester - Institute of Finance

Date Written: August 28, 2014

Abstract

We quantify the effects of financial regulation in an equilibrium model with delegated portfolio management. Fund managers trade stocks and bonds in an order-driven market, subject to transaction taxes and constraints on short-selling and leverage. Results are obtained on the equilibrium properties of portfolio choice, trading activity, market quality and price dynamics under the different regulations. We find that these measures are neither as beneficial as some politicians believe nor as damaging as many practitioners fear.

Keywords: financial regulation, portfolio management, market microstructure

JEL Classification: D53, G18, C63

Suggested Citation

Lensberg, Terje and Schenk-Hoppé, Klaus Reiner and Ladley, Daniel, Costs and Benefits of Financial Regulation: Short-Selling Bans and Transaction Taxes (August 28, 2014). Swiss Finance Institute Research Paper No. 12-27. Available at SSRN: https://ssrn.com/abstract=2128599 or http://dx.doi.org/10.2139/ssrn.2128599

Terje Lensberg

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
Bergen, N-5045
Norway
+47 5595 9206 (Phone)

Klaus Reiner Schenk-Hoppé (Contact Author)

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Daniel Ladley

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester, LE1 7RH
United Kingdom

University of Leicester - Institute of Finance ( email )

Astley Clarke Building
University of Leicester
Leicester, Leicestershire LE17RH
United Kingdom

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