Transaction Tax and Market Quality of U.S. Futures Markets: An Ex-Ante Analysisi

Review of Futures Markets, July 2012, p. 141-177

48 Pages Posted: 5 Sep 2012

See all articles by C. Johan Bjursell

C. Johan Bjursell

Barclays Capital

George H. K. Wang

George Mason University - Department of Finance

Jot Yau

Seattle University

Date Written: August 31, 2012

Abstract

In this paper, we analyze the impact of a transaction tax on the market quality of U.S. futures markets by estimating the elasticity of trading volume and of price volatility with respect to bid-ask spread in a three-equation model framework for eleven financial, agricultural, metals, and energy futures for the period 2005-2010. We find that: (1) Trading volume has a negative relationship with bid-ask spread and a positive relationship with price volatility after controlling for other factors; (2) Bid-ask spread has a negative relationship with trading volume and a positive relationship with price volatility; and (3) Price volatility has a positive relationship with bid-ask spread and with trading volume after controlling for other variables. We demonstrate that a transaction tax, which is analogous to a bigger bid-ask spread, will drastically reduce trading volume if the tax constitutes a significant increase in the total fixed trading cost, and/or the elasticity of trading volume with respect to transaction cost is high enough. Thus, a transaction tax may not raise substantial revenue for the government as suggested in other studies.

Suggested Citation

Bjursell, C. Johan and Wang, George H. K. and Yau, Jot, Transaction Tax and Market Quality of U.S. Futures Markets: An Ex-Ante Analysisi (August 31, 2012). Review of Futures Markets, July 2012, p. 141-177, Available at SSRN: https://ssrn.com/abstract=2139575

C. Johan Bjursell

Barclays Capital ( email )

Tokyo
Japan

George H. K. Wang (Contact Author)

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

Jot Yau

Seattle University ( email )

901 12th Avenue
Seattle, WA 98122
United States

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