Demary, Markus (2007) A heterogenous agents model usable for the analysis of currency transaction taxes. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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Abstract

We extend the model by DeGrauwe and Grimaldi (2006, EER) by currency transaction taxes. This model explains the exchange rate behavior by the interaction of heterogeneous traders who display either trend chasing behavior or rely on a return of the exchange rate back to its arbitrage free fundamental value. Within this model framework we can show analytically that the steady-state of the original model is unaffected by the transaction tax rate. We inferred from numerical simulations that the transaction tax is able to reduce the number of speculative equilibria to zero. Moreover, we show that the tax will lead to a faster convergence of the system back to its fundamental steady state.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Foreign exchange rates, Transaction costs, Stock exchanges, Mathematical models
Series Name:	Working papers (Warwick Business School. Financial Econometrics Research Centre)
Publisher:	Warwick Business School, Financial Econometrics Research Centre
Place of Publication:	Coventry
Date:	10 December 2007
Number:	No.07-
Number of Pages:	39
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Sixth Framework Programme (European Commission) (FP6)
Grant number:	516446 (SFP)
References:	[1] Brock, W. and C. Hommes (1997), "A Rational Route to Randomness" Econometrica, Vol. 65, 1059-1095. [2] Chiarella, C. and T. He (2002), "An Adaptive Model on Asset Markus Demary - Currency Transaction Taxes 31 Pricing and Wealth Dynamics with Heterogeneous Trading Strategies," Computing in Economics and Finance, Vol. 135, Society for Computational Economics. [3] DeGrauwe, P. and M. Grimaldi (2006), "Exchange Rate Puzzles: A Tale of Switching Attractors", European Economic Review, Vol. 50, 1-33. [4] Lux, T. and M. Marchesi (2000), "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents", Journal of Theoretical and Applied Finance, Vol. 3, 675-702. [5] Menkhoff, L. (1997), "Examining the Use of Technical Currency Analysis", International Journal of Finance and Economics, Vol. 2, 307-318. [6] Taylor, M. and H. Allen (1992), "The Use of Technical Analysis in the Foreign Exchange Market", Journal of International Money and Finance, Vol. 11, 304-314. [7] Westerhoff, F. (2003), "Heterogeneous Traders and the Tobin Tax", Journal of Evolutionary Economics, Vol. 13, 53-70.
URI:	http://wrap.warwick.ac.uk/id/eprint/1739

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