Tobin tax and market depth

Details Tobin tax and market depth Tobin tax and market depth

2003-11-25

arxiv.org/abs/cond-mat/0311581v1

Physics

Condensed Matter

Statistical Mechanics

16 pages econophysics, including figures

Scientific paper

This paper investigates - on the basis of the Cont-Bouchaud model - whether a Tobin tax can stabilize foreign exchange markets. Compared to earlier studies, this paper explicitly recognizes that a transaction tax-induced reduction in market depth may increase the price responsiveness of a given order. We find that the imposition of a transaction tax may still achieve a triple dividend: (1) exchange rate fluctuations decrease, (2) currencies are less mispriced, and (3) central authorities raise substantial tax revenues. However, if the price impact function is too sensitive with respect to market depth, stabilization may turn into destabilization.

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