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Securities Transaction Tax and Market Volatility

18 Pages Posted: 7 Dec 2005  

Frank M. Song

The University of Hong Kong - School of Economics and Finance

Junxi Zhang

The University of Hong Kong - School of Economics and Finance; National University of Singapore (NUS) - Department of Economics

Abstract

One well-known regulatory mechanism in securities markets is the use of a securities transaction tax (STT). The conventional wisdom suggests that increases in an STT reduce market volatility by discouraging the trading activity of destabilising short-term traders. A contrary view argues that STT may well increase market volatility due to the reduction in market liquidity. This article rationalises both views in a general equilibrium framework with noise trading. With fundamental risk and supply risk the model is able to document both the conventional wisdom and the contrarian view. We also discuss special cases where there is only fundamental risk or supply risk.

Suggested Citation

Song, Frank M. and Zhang, Junxi, Securities Transaction Tax and Market Volatility. Economic Journal, Vol. 115, No. 506, pp. 1103-1120, October 2005. Available at SSRN: https://ssrn.com/abstract=856703 or http://dx.doi.org/10.1111/j.1468-0297.2005.01034.x

Frank Song (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

Junxi Zhang

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
(852) 2859-2192 (Phone)
(852) 2548-1152 (Fax)

National University of Singapore (NUS) - Department of Economics ( email )

10 Kent Ridge Crescent
Singapore 119260
Republic of Singapore

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