Portfolio Choice and Transactions Taxes
University of Konstanz Discussion Paper No. 03/09
25 Pages Posted: 3 Nov 2004
Date Written: August 2003
In a simple portfolio choice model of two assets, a foreign exchange transactions tax is implemented. We show that the graph in the mu-sigma(2)-range is still a parabola and delineate its characteristics for altering tax rates. We presumed a risk avers investor seeking to minimize investment risks by international diversification of two uncorrelated assets. The main finding is that setting up a portfolio under the new tax condition leads to a higher transaction volume on international financial markets. In contrast, the transactions tax has got a stabilizing character when adjusting the portfolio to increased foreign investment risks.
Keywords: International financial markets, portfolio choice, risk diversification, Tobin tax, transactions tax
JEL Classification: G11, G15, G18, H29, H39, O16, O23
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