Transaction taxes, traders’ behavior and exchange rate risks
Demary, Markus (2006) Transaction taxes, traders’ behavior and exchange rate risks. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. Working papers (Warwick Business School. Financial Econometrics Research Centre) (No.06-).
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We propose a new model of chartist-fundamentalist-interaction in which both groups of traders are allowed to select endogenously between different forecasting models and different investment horizons. Stochastic interest rates in both countries and different behavioral assumptions for trend-extrapolating and fundamental based forecasts determine the agents’ market orders which drive the exchange rate. A numerical analysis of the model shows that it is able to replicate stylized facts of observed financial return time series like excess kurtosis and volatility clustering. Within this framework we study the effects of transaction taxes on exchange rate volatility and traders’ behavior measured by their population fractions. Simulations yield the result that on the macroscopic level these taxes reduce the variance of exchange rate returns, but also increase their kurtosis. Moreover, on the microscopic level the tax harms short-term speculation in favor of long-term investment, while it also harms trading rules based on economic fundamentals in favor to trend extrapolating trading rules.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HB Economic Theory
Q Science > QA Mathematics
|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, Fundamental groups (Mathematics), Taxation -- Mathematical models, Stochastic processes|
|Series Name:||Working papers (Warwick Business School. Financial Econometrics Research Centre)|
|Publisher:||Warwick Business School, Financial Econometrics Research Centre|
|Place of Publication:||Coventry|
|Official Date:||13 November 2006|
|Number of Pages:||45|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Sixth Framework Programme (European Commission) (FP6)|
|Grant number:||516446 (SFP)|
 Bollerslev, T. (1986), ”Generalized Autoregressive Conditional Heteroskedasticity”, Journal of Econometrics, Vol. 31, 307-327.
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