Bianconi, Ginestra, Galla, Tobias and Marsili, Matteo, 1966- (2006) Effects of Tobin taxes in minority game markets. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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Abstract

We show that the introduction of Tobin taxes in agent-based models of currency markets can lead to a reduction of speculative trading and reduce the magnitude of exchange rate fluctuations at intermediate tax rates. In this regime revenues for the market maker obtained from speculators are maximal. We here focus on Minority Game models of markets, which are accessible by exact techniques from statistical mechanics. Results are supported by computer simulations. Our findings suggest that at finite systems sizes the effect is most pronounced in a critical region around the phase transition of the infinite system, but much weaker if the market is operating far from criticality and does not exhibit anomalous fluctuations.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance
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):	Tobin, James, 1918-2002, Foreign exchange -- Taxation, Statistical mechanics, Money market -- 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:	6 March 2006
Number:	No.06-
Number of Pages:	15
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
References:	[1] Tobin J, “The New Economics One Decade Older”, The Eliot Janeway Lectures on Historical Economics in Honour of Joseph Schumpeter 1972 (Princeton University Press, Princeton, US)T [2] Tobin J, Eastern Economic Journal IV 153-159 (1978) [3] Ramonet I, Le Monde Diplomatique “Disarming the markets” editorial 1997 [4] Ehrenstein G, Int. J. Mod. Phys. C, 13, 1323-1331 (2003). [5] FBE Letter A tax on foreign exchange transactions: a false solution to the challenges posed by financial markets, March 2001. [6] Ehrenstein G, Westerhoff F and Stauffer D Quantitative Finance, 5, 213-218, (2005). cond-mat/0311581 [7] F. Westerhoff, J. Evol. Ec., 13, 53-70 (2003). [8] R. Cont, Issues, Quantitative Finance Vol. 1, 223-236 (2001). [9] R. Cont, J.-P. Bouchaud, Macroecon. Dyn. 4, 170 (2000). [10] C. H. Hommes, Heterogeneous Agent Models in Economics and Finance, Tinbergen Institute Discussion Papers 05-056/1, Tinbergen Institute (2005). [11] Challet D, Marsili M and Zhang Y-C 2005 Minority Games (Oxford University Press, Oxford UK) [12] Coolen A C C 2005 The Mathematical Theory of Minority Games (Oxford University Press, Oxford UK) [13] Johnson NF, Jefferies P and Hui PM 2003 Financial market complexity (Oxford University Press, Oxford UK). [14] Challet D and Marsili M Phys. Rev. E 68 036132 (2003) [15] This is an assumption on the cognitive limitation of agents because the game itself will generate a much richer information than just the sequence μ(t). [16] This contrasts with the definition of μ(t) in the original MG, where the information was endogenously generated by the market, with μ(t) encoding the sign of the past M = log2 P price changes. Most collective properties of the model have been shown to be affected only weakly by the origin of information. We focus here on the simpler case of exogenous information which is analytically more convenient. Note however that analytical approaches to MGs with endogenous information are also feasible, but involve much more intricate mathematics [12]. [17] M. Marsili, Physica A 299, 93-103 (2001). [18] We here assume that each agent holds only one trading strategy. Generalizations to multiple strategies per player are straightforward, and can be seen not to alter the qualitative behaviour of the model. Hence we here restrict to the simplest case. [19] D. Challet, A. De Martino, M. Marsili and I. Perez Castillo,JSTAT P04002 (2004). [20] M. Marsili, D. Challet, Phys. Rev. E 64 (5), 056138 (2001). [21] J.A.F. Heimel, A.C.C. Coolen, Phys. Rev. E 63 056121 (2001) [22] D. Challet private communication. [23] Mezard M, Parisi G and Virasoro M Spin glass theory and beyond World Scientific Singapore (1987).
URI:	http://wrap.warwick.ac.uk/id/eprint/1760

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