Journal of Financial Economics Vol. 130 No. 3 2018
One fundamental and two taxes: When does a Tobin tax reduce financial price volatility?
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 China. 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. Overall, our results suggest that a Tobin tax could work in an immature market, but can backfire in a more developed market.
- DOI
- 10.1016/j.jfineco.2018.04.009
- Volume
- 130
- Issue
- 3
- Pages
- 663-692
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref