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Taxing financial transactions in fundamentally heterogeneous markets

Author

Listed:
  • Edoardo Gaffeo
  • Massimo Molinari
Abstract
The recent global financial crisis has revived a well-honored debate on the desirability and feasibility of taxing financial activities to curb speculation and promote price stability. In this paper we apply agent-based computational techniques to explore this issue in a multi-market environment in which the processes driving the fundamental value of the securities traded in different jurisdictions are heterogeneous. A natural exemplification is to assume that security dealers have the opportunity of submitting orders by choosing among stock markets at different stages of development. We argue that the proper policy objective to be targeted is not volatility in itself, but that in excess of the discounted stream of subsequent dividends, that is price efficiency. In this case, a global coordination is incentive-compatible, given that it minimizes the distortion associated to speculative trading on the one hand, and it ensures that the loss of trading volume is lower if compared to the case of unilateral taxation on the other one. Notwithstanding a fundamental heterogeneity of the markets involved, the optimal tax rate turns out to be uniform.

Suggested Citation

  • Edoardo Gaffeo & Massimo Molinari, 2016. "Taxing financial transactions in fundamentally heterogeneous markets," Working Papers in Public Economics 175, University of Rome La Sapienza, Department of Economics and Law.
    • Handle: RePEc:sap:wpaper:wp175
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    Cited by:

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    2. Veryzhenko, Iryna & Harb, Etienne & Louhichi, Waël & Oriol, Nathalie, 2017. "The impact of the French financial transaction tax on HFT activities and market quality," Economic Modelling, Elsevier, vol. 67(C), pages 307-315.
    3. Iryna Veryzhenko & Lise Arena & Etienne Harb & Nathalie Oriol, 2017. "Time to Slow Down for High‐Frequency Trading? Lessons from Artificial Markets," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 24(2-3), pages 73-79, April.

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    More about this item

    Keywords

    agent-based models; financial transaction tax; heterogeneous traders;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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