Some effects of transaction taxes under different microstructures

Paolo Pellizzari * Frank Westerhoff
* Corresponding author
Abstract : We show that the effectiveness of transaction taxes depends on the market microstructure. Within our model, hetero-geneous traders use a blend of technical and fundamental trading strategies to determine their orders. In addition, they may become inactive if the profitability of trading decreases. We find that in a continuous double auction market the imposition of a transaction tax is not likely to stabilize financial markets since a reduction in market liquidity amplifies the average price impact of a given order. In a dealership market, however, abundant liquidity is provided by specialists, and thus a transaction tax may reduce volatility by crowding out speculative orders.
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Paolo Pellizzari, Frank Westerhoff. Some effects of transaction taxes under different microstructures. Journal of Economic Behavior and Organization, Elsevier, 2009, 72 (3), pp.850. 〈10.1016/j.jebo.2009.08.010〉. 〈hal-00727590〉

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