Can a financial transaction tax prevent stock price booms?


Adam, Klaus ; Marcet, Albert ; Merkel, Sebastian ; Beutel, Johannes


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URL: https://ub-madoc.bib.uni-mannheim.de/39024
URN: urn:nbn:de:bsz:180-madoc-390243
Document Type: Working paper
Year of publication: 2015
The title of a journal, publication series: Working Paper Series
Volume: 15-10
Place of publication: Mannheim
Publication language: English
Institution: Außerfakultäre Einrichtungen > Graduate School of Economic and Social Sciences - CDSE (Economics)
School of Law and Economics > VWL, Internat. Wirtschaftsbeziehungen (Adam)
MADOC publication series: Department of Economics > Working Paper Series
Subject: 330 Economics
Classification: JEL: G12 , D84,
Keywords (English): financial transactions tax , Tobin tax , asset price booms
Abstract: We present a stock market model that quantitatively replicates the joint behavior of stock prices, trading volume and investor expectations. Stock prices in the model occasionally display belief-driven boom and bust cycles that delink asset prices from fundamentals and redistribute considerable amounts of wealth from less to more experienced investors. Although gains from trade arise only from subjective belief di¤erences, introducing financial transactions taxes (FTTs)remains undesirable. While FTTs reduce the size and length of boom-bust cycles, they increase the likelihood of such cycles, therby overall return volatility and wealth redistribution. Contingent FTTs, which are levied only above a certain price threshold, give rise to problems of equilibrium multiplicity and non-existence.

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Adam, Klaus ; Marcet, Albert ; Merkel, Sebastian ; Beutel, Johannes (2015) Can a financial transaction tax prevent stock price booms? Open Access Working Paper Series Mannheim 15-10 [Working paper]
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