Estimating the effect of transaction costs using tick-size as a proxy
DOI:
https://doi.org/10.7557/22.5769Keywords:
finance, financial transaction tax, FTT, security transaction tax, STT, Tobin tax, tick-sizeAbstract
A method is proposed for estimating the effect of transaction costs on volatility, using the tick-size as proxy. The method follows three steps: 1) collect only the cases where the tick-size changes from one regime to another, 2) estimate the effect with and without the order book size, and 3) use local data on tick-size and volatility, but instruments from international markets. The first step handles stationarity and dependence. The second step is used to infer the effect of a symmetric transaction cost as tick-size is a revenue and not a cost for liquidity providers. A regression with and without the order book may therefore indicate how much this asymmetry is likely to affect the result. The third step handles endogeneity. The method is applied on intraday data from the Norwegian Stock Exchange (OSE). The results show that both the tick-size and inferred transaction costs seems to have surprisingly little impact on volatility.
References
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Bessembinder, Hendrik, 2000, Tick size, spreads, and liquidity: An analysis of nasdaq securities trading near ten dollars, Journal of Financial Intermediation 9, 213-239. https://doi.org/10.1006/jfin.2000.0288
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Colliard, Jean-Edouard, and Peter Hoffmann, 2013, Sand in the chips: Evidence on taxing transactions in an electronic market, European Central Bank (ECB) Working Paper. https://doi.org/10.2139/ssrn.2215788
Dávila, Eduardo, and Cecilia Parlatore, 2019, Trading costs and informational efficiency, (National Bureau of Economic Research). https://doi.org/10.3386/w25662
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Ehrenstein, Gudrun, F. Westerhoff, and D. Stauffer, 2005, Tobin tax and market depth, Quantitative Finance 5, 213-218. https://doi.org/10.1080/14697680500041064
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Grossman, Sanford J., and Joseph E. Stiglitz, 1980, On the impossibility of informationally efficient markets, The American Economic Review 70, No. 3, 393-408. https://doi.org/10.7916/D8765R99
Grossman, Stanford J., 1981, An introduction to the theory of rational expectations under asymmetric information, The Review of Economic Studies 48, 541-559. https://doi.org/10.2307/2297195
Hanke, Michael, Jürgen Huber, Michael Kirchler, and Matthias Sutter, 2010, The economic consequences of a tobin tax-an experimental analysis, Journal of Economic Behavior & Organization 74, 58-71. https://doi.org/10.1016/j.jebo.2010.02.004
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Kupiec, Paul H., 1996, Noise traders, excess volatility, and a securities transactions tax, Journal of Financial Services Research 10, 115-129. https://doi.org/10.1007/BF00115671
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Reiersøl, Olav, 1945, Confluence analysis by means of instrumental sets of variables, (Almqvist & Wiksell). https://doi.org/10.1080/03461238.1945.10404910
Rosenthal, Dale W.R., and Nordia Diana Marie Thomas, 2012, Transaction taxes in a price maker/taker market, MPRA Paper. http://dx.doi.org/10.2139/ssrn.1572648
Saporta, Victoria, and Kamhon Kan, 1997, The effects of stamp duty on the level and volatility of equity prices, Bank of England Working Paper. https://doi.org/10.2139/ssrn.93656
Shi, Kang , and Juanyi Xu, 2009, Entry cost, the tobin tax, and noise trading in the foreign exchange market, Canadian Journal of Economics-Revue Canadienne D Economique 42, 1501-1526. https://doi.org/10.1111/j.1540-5982.2009.01555.x
Song, Frank M., and Junxi Zhang, 2005, Securities transaction tax and market volatility, The Economic Journal 115, 1103-1120. https://doi.org/10.1111/j.1468-0297.2005.01034.x
Stiglitz, Joseph E., 1989, Using tax policy to curb speculative short-term trading, Journal of Financial Services Research 3, 101-115. https://doi.org/10.1007/BF00122795
Tobin, James, 1978, A proposal for international monetary reform, Eastern economic journal 4, 153-159. www.jstor.org/stable/20642317
Umlauf, Steven R., 1993, Transaction taxes and the behavior of the swedish stock-market, Journal of Financial Economics 33, 227-240. https://doi.org/10.1016/0304-405X(93)90005-V
Werner, Ingrid M., 2003, Comment on ‘some evidence that a tobin tax on foreign exchange transactions may increase volatility’, European Finance Review 7, 511-514. https://doi.org/10.1023/B:EUFI.0000022151.50261.40
Westerhoff, Frank H., 2003, Heterogeneous traders and the tobin tax, Journal of Evolutionary Economics 13, 53-70. https://doi.org/10.1007/s00191-003-0140-5
Westerhoff, Frank H., and Roberto Dieci, 2006, The effectiveness of keynes-tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach, Journal of Economic Dynamics & Control 30, 293-322. https://doi.org/10.1016/j.jedc.2004.12.004
Wright, Philip G, 1928. Tariff on animal and vegetable oils (Macmillan Company, New York). https://dspace.gipe.ac.in/xmlui/bitstream/handle/10973/24323/GIPE-079282.pdf
Ball, Clifford A., 1988, Estimation bias induced by discrete security prices, Journal of Finance 43, 841-865. https://doi.org/10.1111/j.1540-6261.1988.tb02608.x
Bessembinder, Hendrik, 2000, Tick size, spreads, and liquidity: An analysis of nasdaq securities trading near ten dollars, Journal of Financial Intermediation 9, 213-239. https://doi.org/10.1006/jfin.2000.0288
Bianconia, Ginestra , Tobias Gallaa, Matteo Marsilia, and Paolo Pin, 2009, Effects of tobin taxes in minority game markets, Journal of Economic Behavior & Organization 70, 231-240. https://doi.org/10.1016/j.jebo.2008.10.009
Campbell, John Y., and Kenneth A. Froot, 1994, International experiences with securities transaction taxes, Internationalization of Equity Markets 277-308. https://doi.org/10.3386/w4587
Colliard, Jean-Edouard, and Peter Hoffmann, 2013, Sand in the chips: Evidence on taxing transactions in an electronic market, European Central Bank (ECB) Working Paper. https://doi.org/10.2139/ssrn.2215788
Dávila, Eduardo, and Cecilia Parlatore, 2019, Trading costs and informational efficiency, (National Bureau of Economic Research). https://doi.org/10.3386/w25662
Deng, Yongheng, Xin Liu, and Shang-Jin Wei, 2018, One fundamental and two taxes: When does a tobin tax reduce financial price volatility?, Journal of Financial Economics 130, 663-692. https://doi.org/10.1016/j.jfineco.2018.04.009
Ehrenstein, Gudrun, 2002, Cont-bouchaud percolation model including tobin tax, International Journal of Modern Physics C 13, 1323-1331. https://doi.org/10.1142/S0129183102003917
Ehrenstein, Gudrun, F. Westerhoff, and D. Stauffer, 2005, Tobin tax and market depth, Quantitative Finance 5, 213-218. https://doi.org/10.1080/14697680500041064
Gottlieb, Gary, and Avner Kalay, 1985, Implications of the discreteness of observed stock-prices, Journal of Finance 40, 135-153. https://doi.org/10.1111/j.1540-6261.1985.tb04941.x
Grossman, Sanford J., and Joseph E. Stiglitz, 1980, On the impossibility of informationally efficient markets, The American Economic Review 70, No. 3, 393-408. https://doi.org/10.7916/D8765R99
Grossman, Stanford J., 1981, An introduction to the theory of rational expectations under asymmetric information, The Review of Economic Studies 48, 541-559. https://doi.org/10.2307/2297195
Hanke, Michael, Jürgen Huber, Michael Kirchler, and Matthias Sutter, 2010, The economic consequences of a tobin tax-an experimental analysis, Journal of Economic Behavior & Organization 74, 58-71. https://doi.org/10.1016/j.jebo.2010.02.004
Hau, Harald, 2006, The role of transaction costs for financial volatility: Evidence from the paris bourse, Journal of the European Economic Association 4, 862-890. https://doi.org/10.1162/JEEA.2006.4.4.862
Ke, Mei-Chu , Ching-Hai Jiang, and Yen-Sheng Huang, 2004, The impact of ticksize on intraday stock price behavior: Evidence from the taiwan stock exchange, Pacific-Basin Finance Journal 12, 19-39. https://doi.org/10.1016/S0927-538X(03)00019-2
Kirchler, Michael, Jürgen Huber, and Daniel Kleinlercher, 2011, Market microstructure matters when imposing a tobin tax-evidence from the lab, Journal of Economic Behavior & Organization 80, 586-602. https://doi.org/10.1016/j.jebo.2011.06.001
Kupiec, Paul H., 1996, Noise traders, excess volatility, and a securities transactions tax, Journal of Financial Services Research 10, 115-129. https://doi.org/10.1007/BF00115671
Lanne, Markku , and Timo Vesala, 2010, The effect of a transaction tax on exchange rate volatility, International Journal of Finance & Economics 15, 123-133. https://doi.org/10.1002/ijfe.399
Mannaro, Katiuscia , Michele Marchesi, and Alessio Setzu, 2008, Using an artificial financial market for assessing the impact of tobin-like transaction taxes, Journal of Economic Behavior & Organization 67, 445-462. https://doi.org/10.1016/j.jebo.2006.10.011
Mulherin, J. Harold, 1990, Regulation, trading volume and stock-market volatility, Revue Economique 41, 923-938. https://doi.org/10.3406/reco.1990.409244
Ness, Bonnie F. Van, Robert A. Van Ness, and Stephen W. Pruitt, 2000, The impact of the reduction in tick increments in major u.S. Markets on spreads, depth, and volatility, Review of Quantitative Finance and Accounting 15, 153-167. https://doi.org/10.1023/A:1008369114062
Pomeranets, Anna, and Daniel G. Weaver, 2013, Securities transaction taxes and market quality, Bank of Canada Working Paper 2011 26. https://doi.org/10.2139/ssrn.1980185
Reiersøl, Olav, 1945, Confluence analysis by means of instrumental sets of variables, (Almqvist & Wiksell). https://doi.org/10.1080/03461238.1945.10404910
Rosenthal, Dale W.R., and Nordia Diana Marie Thomas, 2012, Transaction taxes in a price maker/taker market, MPRA Paper. http://dx.doi.org/10.2139/ssrn.1572648
Saporta, Victoria, and Kamhon Kan, 1997, The effects of stamp duty on the level and volatility of equity prices, Bank of England Working Paper. https://doi.org/10.2139/ssrn.93656
Shi, Kang , and Juanyi Xu, 2009, Entry cost, the tobin tax, and noise trading in the foreign exchange market, Canadian Journal of Economics-Revue Canadienne D Economique 42, 1501-1526. https://doi.org/10.1111/j.1540-5982.2009.01555.x
Song, Frank M., and Junxi Zhang, 2005, Securities transaction tax and market volatility, The Economic Journal 115, 1103-1120. https://doi.org/10.1111/j.1468-0297.2005.01034.x
Stiglitz, Joseph E., 1989, Using tax policy to curb speculative short-term trading, Journal of Financial Services Research 3, 101-115. https://doi.org/10.1007/BF00122795
Tobin, James, 1978, A proposal for international monetary reform, Eastern economic journal 4, 153-159. www.jstor.org/stable/20642317
Umlauf, Steven R., 1993, Transaction taxes and the behavior of the swedish stock-market, Journal of Financial Economics 33, 227-240. https://doi.org/10.1016/0304-405X(93)90005-V
Werner, Ingrid M., 2003, Comment on ‘some evidence that a tobin tax on foreign exchange transactions may increase volatility’, European Finance Review 7, 511-514. https://doi.org/10.1023/B:EUFI.0000022151.50261.40
Westerhoff, Frank H., 2003, Heterogeneous traders and the tobin tax, Journal of Evolutionary Economics 13, 53-70. https://doi.org/10.1007/s00191-003-0140-5
Westerhoff, Frank H., and Roberto Dieci, 2006, The effectiveness of keynes-tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach, Journal of Economic Dynamics & Control 30, 293-322. https://doi.org/10.1016/j.jedc.2004.12.004
Wright, Philip G, 1928. Tariff on animal and vegetable oils (Macmillan Company, New York). https://dspace.gipe.ac.in/xmlui/bitstream/handle/10973/24323/GIPE-079282.pdf
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2021-03-11
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