One Fundamental and Two Taxes: When Does a Tobin Tax Reduce Financial Price Volatility?
76 Pages Posted: 3 Nov 2014 Last revised: 16 Jun 2017
Date Written: March 11, 2017
We aim to make two contributions to the literature on the effects of transaction costs on financial price volatility. First, by augmenting a double differencing approach with a research design with three ingredients (a common set of companies simultaneously listed on two stock exchanges; binding capital controls; and different timing of changes in transaction costs), we obtain a control group that has identical corporate fundamentals as the treatment group. We apply the research design to Chinese stocks that are cross-listed in Hong Kong and Mainland. Second, we allow transaction costs to have different effects in markets with different maturity. We find a significantly negative relationship, on average, between stamp duty increase and price volatility. However, this average effect masks some important heterogeneity. In particular, when institutional investors have become a significant part of the traders’ pool, we find an opposite effect. This suggests that a Tobin tax may work in an immature market but can backfire in a more developed market.
Keywords: Tobin tax, institutional investors, cross-listed stocks
JEL Classification: G12, G15
Suggested Citation: Suggested Citation