Do Tobin taxes help stop stock price bubbles?

Purpose This study aims to report on experimental asset markets designed to examine the impact of a levy on trade, as well as the taxation authority’s ability to raise tax revenue when markets are subject to mispricing. Some have suggested that a transaction tax will discourage irrational speculation and lead to more efficient markets, but others argue that a higher cost of trading will prove to be an impediment to trade with no useful outcomes. Design/methodology/approach The authors’ goal is to provide insight on the impact of a transaction tax in a very specific asset market. The authors chose this design because the robustness of the bubble and crash pattern points to an environment that is particularly appropriate for the study of the effectiveness of a transaction tax in promoting efficient pricing. Furthermore, in a laboratory, the authors can control for extraneous factors that are problematic in the study of naturally occurring environments. Findings The authors examine whether a securities transaction tax promotes efficiency in markets that are prone to mispricing and find little evidence that a tax on trade will reduce speculation. Research limitations/implications This study’s experimental environment is, of course, an abstraction of naturally occurring markets and it may be that the model excludes important aspects. Social implications The authors find that a tax on financial transactions allows the taxation authority to raise significant revenue with little impact on pricing or trading volume. Originality/value To the best of the authors’ knowledge, this study is the first systematic examination of a transaction tax on outcomes in a market that is prone to mispricing.

Impact of ETF Listing on the Returns Generated by Underlying Stocks: Indian Evidence

The advent of exchange traded funds (ETFs) has rendered index trading much affordable compared to their futures counterparts. The present study attempts to examine the impact of ETF listing on the price of the constituent securities of the index that it aims to track. The sample comprises of all the equity ETFs listed in India from 1 January 2002 to 31 March 2019. Event study analysis has been used to examine whether listing of ETFs bore any price impact on the constituent stocks of ETFs. To account for robustness, both parametric and non-parametric tests have been employed. The estimates obtained from event study analysis revealed that the constituent stocks generated insignificant returns for the period extending from January 2002 to March 2009 and April 2009 to March 2013 but positive and significant cumulative average abnormal returns (CAARs) post ETF listing for the period ranging from April 2013 to March 2019, thus providing evidence in support of positive price impact. The permission granted to pension funds, insurers and Employees’ Provident Fund Organisation (EPFO) to invest their funds in ETFs as well as reduction in Securities Transaction Tax (STT) account for the observed price differential. An analysis of the factors accounting for the variation in valuation effects ascertained that the stocks that were traded thinly prior to ETF listing and those forming part of ETFs with larger asset base experienced positive price impact following ETF listing. JEL Codes: G11, G14

Analysis of Price Discovery Effect in the Single Stock Futures Market

This paper examines the price dynamics in the single stocks futures and spot markets. In order to enhance the liquidity of the stock futures market, Korea Exchange introduced the liquidity provider in 2014, and exempted the securities transaction taxes on stocks sold for hedging purposes of liquidity provider from 2015. This study performed a vector error correction model (VECM) based on spot-futures market linkage to evaluate the effectiveness of the liquidity policy by examining the difference in the price discovery around the event. The main empirical analysis results are summarized as follows. First, a statistically significant sample of price discovery over the entire period was evident in the interrelationship between spot and futures. This implies that stock futures have information effect equivalent to spot price, which is different from the previous studies in which futures lead the spot price discovery significantly as in the case of KOSPI200 futures market. Second, the tendency of feedback between spot and futures is consistent in price discovery even after introduction of liquidity provider and exemption of securities transaction tax. Overall, empirical results suggest that the effectiveness of the stock futures market policy is limited during the sample period and the additional measures to enhance the long term activation are needed.

Securities Transaction Taxes and Market Quality

We study changes in market quality associated with 9 modifications to the New York State securities transaction tax (STT) between 1932 and 1981 and 3 changes to the federal STT between 1932 and 1966. We find that when there is an increase in the level of an STT, individual stock volatility increases, bid–ask spreads widen, price impacts are greater, and volume decreases. We examine the propensity of traders to switch trading locations to avoid the tax and find mixed evidence that they will change locations. Overall, our findings support the notion that the imposition of or increases in an STT harm market quality.