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

See all articles by Yongheng Deng

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Xin Liu

Research School of Finance, Actuarial Studies & Applied Statistics, CBE, Australian National University

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Date Written: March 11, 2017

Abstract

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

Deng, Yongheng and Liu, Xin and Wei, Shang-Jin, One Fundamental and Two Taxes: When Does a Tobin Tax Reduce Financial Price Volatility? (March 11, 2017). Available at SSRN: https://ssrn.com/abstract=2517095

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://https://bus.wisc.edu/faculty/yongheng-deng

Xin Liu (Contact Author)

Research School of Finance, Actuarial Studies & Applied Statistics, CBE, Australian National University ( email )

Kingsley Street
acton, ACT 0200
Australia

Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

Register to save articles to
your library

Register

Paper statistics

Downloads
38
Abstract Views
297
PlumX Metrics