Thematic Research: Transaction Taxes: Effects and Opportunities

By Jeffrey N. Saret on January 15, 2014
Flag of French outside a building with a giant clock

Securities transaction (or “Tobin”) taxes clearly impose costs, but they may also create information inefficiencies that give skilled managers an advantage.

Transaction taxes distort free markets. With the increasing popularity of transaction taxes in France, Italy, and elsewhere in Europe, understanding how these distortions affect market microstructure as well as market efficiency is important for active managers who are not just trying to preserve alpha, but also trying to identify new patterns that may potentially be modeled and traded.

What potential effects have “Tobin taxes” had on French and Italian markets?

Existing research on transaction taxes focuses on market microstructure. This paper, The Effect of French and Italian Transaction Taxes on Equity Market Microstructure and Market Efficiency, applies a difference-in-difference regression model to estimate the effect of the recently applied transaction taxes on the French and Italian equity markets. The results for market participants subject to the tax from these regressions—a 15–25 percent decrease in volume in France and a 4-8 percent decrease in Italy; a 20–70 basis point increase in bid/ask spreads as a percent of the open price in France and a 80–140 basis point increase in Italy; and no significant change in volatility in either country—may help investors forecast the likely changes in market microstructure if 11 European countries execute their plan to apply a common, cross-national transaction tax.

Transaction taxes and market efficiency

In addition, this paper also considers a topic rarely found in the literature on transaction taxes: market efficiency. Specifically, this paper estimates the increase in the time lag for common (i.e., market-wide) information to affect individual equity prices. Results indicate that the lag increased by approximately 30 percent in France and by more than 150 percent in Italy.

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