Abstract
Recent agent-based financial market models came to the result that taxing financial transactions does not per se increase financial stability and that the response of volatility and misalignments to rising tax rates seem to be u-shaped. Moreover, greed and the risk appetite of traders are often blamed for financial instability and there is no evidence how greed and risk aversion affect the effectiveness of regulations in financial markets. We aim to add to this gap in the literature by analyzing how the effectiveness of transaction taxes depend on different behavioral patterns within an agent-based framework. Our simulations indicate that a tax rate of 0.1% demarcates the stabilizing tax regime from the destabilizing one. We figure out that transaction taxes are less effective, either when chartists trade more aggressively, fundamentalists trade less aggressively, agents switch more frequently between trading strategies or only have short memory in their fitness measures. Lower risk aversion of agents, however, makes higher tax rates more effective as indicated by a flatter volatility response curve. We conclude that additional regulations should concentrate on the traders’ responsibilities for their risk-exposure.
Similar content being viewed by others
References
Alfarano S, Lux T, Wager F (2005) Estimation of agent-based models: the case of an asymmetric herding model. Comput Econ 26: 19–49
Boswijk P, Hommes C, Manzan S (2007) Behavioral heterogeneity in stock prices. J Econ Dyn Control 31: 1938–1970
Brock W, Hommes C (1998) Heterogeneous beliefs and routes to chaos in a simple asset pricing model. J Econ Dyn Control 22: 1235–1274
DeGrauwe P, Grimaldi M (2006) Exchange rate puzzles: a tale of switching attractors. Eur Econ Rev 50: 1–33
Demary M (2008) Who does a currency transaction tax harm more: short-term speculators or long-term investors?. Jahrbücher für Nationalökonomie und Statistik 228: 228–250
Demary M (2010) Transaction taxes and traders with heterogeneous investment horizons in an agent-based financial market model. Econ Open Access Open Assess E-Journal 4:2010–2018, http://www.economics-ejournal.org/economics/journalarticles/2010-8
Franke R, Westerhoff F (2009) Validation of a structural stochastic volatility model of asset pricing, working paper
Gilli M, Winker P (2003) A global optimization heuristic for estimating agent-based models. Comput Stat Data Anal 42: 299–312
Ghongadze J, Lux T (2009) Modelling the dynamics of EU economic sentiment indicators: an interaction-based approach. Kiel working papers no. 1482, Kiel Institute for the World Economy
Haber G (2008) Monetary and fiscal policy analysis with an agent-based macroeconomic model. Jahrbücher für National konomie und Statistik 228(2+3): 276–295
Hommes C (2006) Heterogeneous agents models in economics and finance. In: Tesfatsion L, Judd K (eds) Handbook of computational economics, vol 2: agent-based computational economics. North-Holland, Amsterdam, pp 1107–1186
Keynes JM (1936) The general theory of employment. Interest and Money, New York
LeBaron B (2006) Agent-based computational finance. In: Tesfatsion L, Judd K (eds) Handbook of computational economics, vol 2: agent-based computational economics. North-Holland, Amsterdam, pp 1187–1233
Lux T (2009a) Stochastic behavioral asset pricing models and the stylized facts. In: Thorsten H, Klaus S-H (eds) Handbook of financial markets: dynamics and evolution. North Holland, Amsterdam, pp 161–211
Lux T (2009b) Rational forecasts or social opinion dynamics? Identification of interaction effects in a business climate survey. J Econ Behav Organ 72(2): 638–655
Lux T, Ausloos M (2002) Market fluctuations I: scaling, multi-scaling and their possible origins. In: Bunde A, Kropp J, Schellnhuber HJ (eds) Theories of desaster: scaling laws governing weather, body and stock market dynamics. Springer, Berlin, pp 373–410
Lux T, Marchesi M (2000) Volatility clustering in financial markets: a microsimulation of interacting agents. Int J Finance Econ 3: 675–702
Manski C, McFadden D (1981) Structural analysis of discrete data with econometric applications. MIT Press, Cambridge
Manzan S, Westerhoff F (2005) Representativeness of news and exchange rate dynamics. J Econ Dyn Control 29: 677–689
Manzan S, Westerhoff F (2007) Heterogeneous expectations, exchange rate dynamics and predictability. J Econ Behav Organ 64: 111–128
Menkhoff L, Schmidt U (2005) The use of trading strategies by fund managers: some first survey evidence. Appl Econ 37(15): 1719–1730
Menkhoff L, Taylor M (2007) The obstinate passion of foreign exchange professionals: technical analysis. J Econ Lit XLV: 936–972
Pelizzari P, Westerhoff F (2007) Some effects of transaction taxes under different market microstructures. Quantitative Finance Research Center Research Paper 212
R Development Core Team (2009) R: a language and environment for statistical computing. R Foundation for Statistical Computing, Vienna. http://www.R-project.org
Taylor M, Allen H (1992) The use of technical analysis in the foreign exchange market. J Int Money Finance 11: 304–314
Tobin J (1978) A proposal for international monetary reform. East Econ J 4: 153–159
Westerhoff F (2001) Speculative behavior, exchange rate volatility and central bank interventions. Cent Eur J Oper Res 9: 31–50
Westerhoff F (2003a) Heterogeneous traders and the tobin tax. J Evol Econ 13: 53–70
Westerhoff F (2003b) Speculative markets and the effectiveness of price limits. J Econ Dyn Control 28: 493–508
Westerhoff F (2003c) Anchoring and psychological barriers in foreign exchange markets. J Behav Finance 4: 65–70
Westerhoff F (2003d) Expectations driven distortions in the foreign exchange market. J Econ Behav Organ 51: 389–412
Westerhoff F (2003e) Speculative behavior and asset price dynamics. Nonlinear Dyn Psychol Life Sci 7: 245–262
Westerhoff F (2004a) Greed, fear and stock market dynamics. Physica A 343: 635–642
Westerhoff F (2004b) Multiasset market dynamics. Macroecon Dyn 8: 596–616
Westerhoff F (2006) Technical analysis based on price-volume signal and the power of trading breaks. Int J Theor Appl Finance 9: 227–244
Westerhoff F (2008) The use of agent-based financial market models to test the effectiveness of regulatory policies. Jahrbücher für Nationalökonomie und Statistik 228: 195–227
Westerhoff F (2009) Exchange rate dynamics: a nonlinear survey. In: Rosser B (eds) Handbook of complexity research. Edward Elgar, Cheltenham, pp 287–325
Westerhoff F, Dieci R (2006) The effectiveness of Keynes-Tobin transaction taxes when heterogeneous agents can trade in different markets: a behavioral finance approach. J Econ Dyn Control 30: 293–322
Westerhoff F, Reitz S (2003) Nonlinearities and cyclical behavior: the role of chartists and fundamentalists. Stud Nonlinear Dyn Economet 7(4) (Article 3)
Weidlich A, Veit D (2008) Agent-based simulations for electricity market regulation advice: procedures and an example. Jahrbücher für Nationalökonomie und Statistik 228(2+3): 149–172
Wieland C, Westerhoff F (2005) Exchange rate dynamics, central bank interventions and chaos control methods. J Econ Behav Organ 58: 117–132
Winker P, Gilli M, Jeleskovic V (2007) An objective function for simulation based inference on exchange rate data. J Econ Int Coordinat 2: 125–145
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Demary, M. Transaction taxes, greed and risk aversion in an agent-based financial market model. J Econ Interact Coord 6, 1–28 (2011). https://doi.org/10.1007/s11403-010-0071-9
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11403-010-0071-9
Keywords
- Agent-based financial market models
- Regulations of financial markets
- Financial stability
- Monte carlo analysis
- Technical and fundamental analysis