The effect of a transaction tax on exchange rate volatility
Lanne, Markku; Vesala, Timo (05.04.2006)
Numero
11/2006Julkaisija
Suomen Pankki
2006
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-20140807244Tiivistelmä
We argue that a transaction tax is likely to amplify, not dampen, volatility in the foreign exchange markets.Our argument stems from the decentralised trading practice and the presumable discrepancy between informed and uninformed traders valuations.Since informed traders valuations are likely to be less dispersed, a transaction tax penalises informed trades disproportionately, leading to increased volatility.Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM/USD and JPY/USD returns. High-frequency data are used and an increase in transaction costs is found to have a significant positive effect on volatility. Key words: transaction tax, exchange rates, volatility JEL classification numbers: F31, F42, G15, G28
Julkaisuhuomautus
Ilmestynyt myös European University Institute ; Department of Economics ; EUI working paper ; 2005/19.