The Impact of the Tobin Tax in a Heterogeneous Agent Model of the Foreign Exchange Market
- 235 Downloads
We explore possible effects of a Tobin tax on exchange rate dynamics in a heterogeneous agent model. To assess the impact of the Tobin tax in this framework, we extend the model of De Grauwe and Grimaldi (Eur Econ Rev 50(1):1–33, 2006) by including transaction costs and perform numerical simulations. Motivated by the importance of the market microstructure, we choose to model the market as being cleared by a Walrasian auctioneer. This setting could more closely resemble the two-layered structure of foreign exchanges at daily frequency than a price impact function, which is often adopted in similar studies. We find that the Tobin tax can deliver a moderate reduction of return volatility and kurtosis. In addition, simulations indicate that the Tobin tax reduces the degree of mispricing in the time series, which is primarily achieved by eliminating long-lasting deviations from fundamental value.
KeywordsTobin tax Foreign exchange market Agent-based modeling Walrasian auctioneer
We are grateful to an anonymous reviewer for many insightful comments and suggestions.
- BIS. (2013). Triennial central bank survey. Tech. rep., Bank for International Settlements, available online at: http://www.bis.org/publ/rpfx13fx.pdf. Accessed 20 October 2015.
- Chen, S. H., Chang, C. L., & Du, Y. R. (2012). Agent-based economic models and econometrics. The Knowledge Engineering Review, 27, 187–219. doi: 10.1017/S0269888912000136, http://journals.cambridge.org/article_S0269888912000136
- Cont, R., Kukanov, A., & Stoikov, S. (2014). The price impact of order book events. Journal of Financial Econometrics, 12(1), 47–88. doi: 10.1093/jjfinec/nbt003, http://jfec.oxfordjournals.org/content/12/1/47.abstract, http://jfec.oxfordjournals.org/content/12/1/47.full.pdf+html
- ČNB Czech National Bank. (2014). Dataset of exchange rates: 2 Jan 2013–27 Dec 2013. Available online at: https://www.cnb.cz/cs/financni_trhy/devizovy_trh/kurzy_devizoveho_trhu/rok.txt?rok=2013. Accessed 20 October 2015.
- Demary, M. (2006). Transaction taxes, trader’s behavior and exchange rate risks. Christian-Albrechts-University of Kiel Department of Economics, Working paper 14.Google Scholar
- Demary, M. (2010). Transaction taxes and traders with heterogeneous investment horizons in an agent-based financial market model. Economics: The Open-Access, Open-Assessment E-Journal, 4(2010–8), 1–44.Google Scholar
- Frankel, J. A., & Froot, K. A. (1990). Chartists, fundamentalists, and trading in the foreign exchange market. The American Economic Review, 80(2), 181–185.Google Scholar
- Hein, O., Schwind, M., & Spiwoks, M. (2006). A microscopic currency market model with a modified Tobin tax. In Workshop on economic heterogeneous interacting agents (WEHIA 06).Google Scholar
- Kempf, A., & Korn, O. (1999). Market depth and order size 1. Journal of Financial Markets, 2(1), 29–48. doi: 10.1016/S1386-4181(98)00007-X, http://www.sciencedirect.com/science/article/pii/S138641819800007X
- Lavička, H., Lichard, T., & Novotný, J. (2013). Sand in the wheels or the wheels in sand? Tobin taxes and market crashes. FNSPE, CERGE-EI and Cass Business School, City University London, UK. Working paper.Google Scholar
- LeBaron, B. (2005). Agent-based computational finance. Tech. rep., International Business School, Brandeis University, USA.Google Scholar
- Li, F. (2015). Pboc’s yi proposes punitive Tobin tax to deter yuan speculators. Available online at: http://www.bloomberg.com/news/articles/2015-10-02/pboc-s-yi-suggests-punitive-tobin-tax-to-deter-yuan-speculators. Accessed 27 November 2015.
- Lillo, F., Farmer, J. D., & Mantegna, R. N. (2002). Single curve collapse of the price impact function for the New York stock exchange. Tech. rep., Istituto Nazionale per la Fisica della Materia and Santa Fe Institute.Google Scholar
- Mannaro, K., Marchesi, M., & Setzu, A. (2005). The impact of transaction taxes on traders’ behavior and wealth: A microsimulation. In 10th annual workshop on economic heterogeneous interacting agents (WEHIA 2005).Google Scholar
- Potters, M., & Bouchaud, J. P. (2003). More statistical properties of orderbooks and price impact. In Proceedings of the International Econophysics Conference. Physica A: Statistical Mechanics and Its Applications, 324(1–2):133–140. doi: 10.1016/S0378-4371(02)01896-4, http://www.sciencedirect.com/science/article/pii/S0378437102018964
- Sewell, M. (2011). Characterization of financial time series. UCL Department of Computer Science, Research Note RN (vol. 11, no. 1, pp. 1–35).Google Scholar
- Stonedahl, F., & Wilensky, U. (2010). Behaviorsearch (computer software). Evanston, IL: Center for Connected Learning and Computer Based Modeling, Northwestern University. Available online at: http://www.behaviorsearch.org
- Stonedahl, F. J. (2011). Genetic algorithms for the exploration of parameter spaces in agent-based models. PhD thesis, Northwestern University, Evanston, IL, USA, aAI3489404.Google Scholar
- Tobin, J. (1978). A proposal for international monetary reform. Eastern Economic Journal, 4(3–4), 153–159.Google Scholar
- Westerhoff, F. H. (2004b). Speculative dynamics, feedback traders and transaction taxes: A note. Jahrbuch für Wirtschaftswissenschaften/Review of Economics, 55, 190–195.Google Scholar
- Wilensky, U. (1999). NetLogo. Center for connected learning and computer-based modeling. Evanston, IL: Northwestern University.Google Scholar