Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread

Dupont, Dominique Y. and Lee, Gabriel S. (May 2003) Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread. IHS Economics Series 132

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Abstract or Table of Contents

Abstract: This paper investigates the effects of transaction taxes on depth and bid-ask spread under asymmetric information. The paper uses a static model where a monopolistic market maker faces liquidity and informed traders. Introducing transaction taxes could, surprisingly, lead to increase in depth. Under some distributional assumptions, when market conditions are favorable to the dealer, the spread responds less than proportionally to an increase in the transaction tax while the depth actually increases . In contrast, when market conditions are unfavorable to the dealer, the spread widens more than proportionally and the depth decreases, potentially to zero, in response to an increase in the transaction tax. Our model sheds light on the disagreement in the empirical literature on the relative magnitude of transaction costs on trading volume.;

Item Type: IHS Series
Keywords: 'Asymmetric information' 'Securities transaction taxes' 'Liquidity'
Classification Codes (e.g. JEL): G14, D82
Status: Published
Date Deposited: 26 Sep 2014 10:37
Last Modified: 22 Jul 2017 07:44
URI: http://irihs.ihs.ac.at/id/eprint/1493

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