Asset Price Fluctuations, Financial Crises and the Stabilizing Effects of a General Transaction Tax

WIFO Working Paper No. 340

29 Pages Posted: 26 Nov 2010

See all articles by Stephan Schulmeister

Stephan Schulmeister

Austrian Institute of Economic Research

Date Written: 2009

Abstract

The deepening of the recent crisis was driven by the simultaneous devaluation of stock wealth, housing wealth and commodity wealth. The potential for this devaluation process had been “built up” during the boom of stock prices, house prices and commodity prices between 2003 and 2007. Hence, this paper sketches the main causes and effects of long swings in asset prices in the context of the current crisis. It is shown that "bull markets" are brought about by upward price runs (i.e., monotonic movements) lasting longer than counter-movements for an extended period of time (and vice versa for "bear markets"). This pattern of asset price dynamics is the result of “trading as usual” on (highly regulated) derivatives exchanges. The most popular trading practices like “technical analysis” contribute significantly to asset price overshooting. These practices strengthened both, the boom of asset prices until mid 2007 as well as their collapse in recent months. A general financial transaction tax would limit the wide fluctuations of stock prices, exchange rates and commodity prices.

Keywords: Boom and Bust of Asset Prices, Speculation, Technical Trading, Transaction Tax

JEL Classification: E30, F31, G12, G13, G14, H25

Suggested Citation

Schulmeister, Stephan, Asset Price Fluctuations, Financial Crises and the Stabilizing Effects of a General Transaction Tax (2009). WIFO Working Paper No. 340, Available at SSRN: https://ssrn.com/abstract=1714339 or http://dx.doi.org/10.2139/ssrn.1714339

Stephan Schulmeister (Contact Author)

Austrian Institute of Economic Research ( email )

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HOME PAGE: http://https://stephanschulmeister.wifo-pens.at/

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