The effectiveness of Keynes–Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach

We develop a model in which boundedly rational agents apply technical and fundamental analysis to identify trading signals in two different speculative markets. Whether an agent trades and, if so, in which market with which strategy depends on profit considerations. As it turns out, an ongoing evolu...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2006-02, Vol.30 (2), p.293-322
Main Authors: Westerhoff, Frank H., Dieci, Roberto
Format: Article
Language:English
Subjects:
Bounded rationality
Capital tax
Economic models
Financial economics
Financial models
Financial speculation
Heterogeneous agents
Regulation
Securities trading
Signalling
Speculation
Speculative markets
Stock exchange
Studies
Taxes
Technical and fundamental analysis
Transaction tax
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Summary:We develop a model in which boundedly rational agents apply technical and fundamental analysis to identify trading signals in two different speculative markets. Whether an agent trades and, if so, in which market with which strategy depends on profit considerations. As it turns out, an ongoing evolutionary competition between the trading strategies causes complex price dynamics which closely resembles the behavior of actual speculative prices. Moreover, we find that if the agents have to pay a transaction tax in one market, price variability decreases in this market but increases in the other market. However, the imposition of a uniform tax on all transactions stabilizes both markets. Our results suggest that if regulators of a market introduce a transaction tax, other markets are likely to follow.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2004.12.004