Financial Transaction Taxes, Market Composition, and Liquidity
94 Pages Posted: 12 Feb 2013 Last revised: 1 Nov 2016
Date Written: October 14, 2016
We use the introduction of a financial 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 affecting 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 findings show that moderate aggregate effects 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: Suggested Citation