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Taxing the Financial Transactions in Europe : new empirical investigations

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Olivier Damette (Universiy of Lorraine (France),
BETA-CNRS, CAC member, Climate Economics Chair Paris
Associate)
Eesti Pank Seminar, Tallinn
March 2018

Publié dans : Économie & finance
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Taxing the Financial Transactions in Europe : new empirical investigations

  1. 1. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Taxing the Financial Transactions in Europe : new empirical investigations Olivier Damette (Universiy of Lorraine (France), BETA-CNRS, CAC member, Climate Economics Chair Paris Associate) Eesti Pank Seminar, Tallinn March 2018 Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  2. 2. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Brief Vitae PhD in Economics in 2007, Nancy University (France), « Essays on Tobin Tax » Junior Economist-Econometrician, French Central Bank, Paris, 2008-2009 ; medium-run forecasting, macroeconometric modeling, academic research Assistant Professor, Paris 12 University, 2009-2012 Full Professor, Lorraine University, Metz, BETA-CNRS Research Fellow, CAC Cliometrics and Complexity (Lyon) and Cimate Economic Chair Paris, since 2015 Invited Researcher (Poland, Canada), grant from the French government Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  3. 3. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Research topics related to Central Banks activity Topics New-Keynesian Macroeconomics : Tobin Tax, Monetary policy and Cliometrics, Wealth effects Methodology : Macroeconometrics (NL Times Series and NS Panel Data), GE modeling (CGE, DSGE) a few publications 1 2017 : ”Liquidity traps and large-scale financial crises”, (with E. Castelnuovo G. Cagianno, A. Parent, G. Pellegrino), Journal of Economic Dynamics and Control 2 2016 : ”Did the FED respond to liquidity shortage episodes during the Great Depression ?” (with A. Parent), Macroeconomic Dynamics 3 2016 :”Mixture Distribution Hypothesis and the impact of a Tobin tax on exchange rate volatility : a reassessment”, Macroeconomic Dynamics 4 2010 : ”Wealth effects on private consumption : The French case” (with V. Chauvin), Banque de France Working Paper + Springer book Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  4. 4. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Motivations and the story of the FTT project Since the downturn/subprime crisis/Euro Zone and Sovereign Debt crisis, Tobin Tax or FTT is viewed as a possible way of dampening down the deficit of industrialized countries (like France, TT can generate large revenues) and to regulate the financial system by taxing the intermediaries (Robin Hood Tax) Taxation project for European Countries discussed in European Parliament : approved in 2011 initially but still not at work, only unilateral tax in France and in Italy (only in some equities concerning big companies), why ? First answer : a very controversial topic ! The original purpose of a Tobin Tax was not to produce revenues but to stabilize exchange rates (end of BW, Mundell Incomp Triangle) and reduce finan. volatility Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  5. 5. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t ⇒ preserve and strenghten the autonomy of national monetary policies (Tobin[1978]) : ”monetary policy becomes, under floating ER, ER policy” ⇒ reduce the foreign ER and financial volatility (Tobin[1974, 1978, 1984, 1996] : short-term round-trip transactions (speculative ?) are more destabilizing than long-term transactions (cf ”‘beauty contest”’ of Keynes [1936]) → tax would reduce volatility by discouraging short transactions and crowding out speculators and noise traders from the Forex Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  6. 6. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t However, Tobin’s view has been challenged 1 not all short-term transactions are speculative (hot potato phenomenon ; liquidity and risk-sharing behavior) 2 indiscriminate tax (liquidity and informative transactions by fundam traders may be reduced), it would increase the volatility and be counterproductive 3 a liquidity (but not necessary large ?) market is likely to be more stable than a tin market (Davidson [1997], Bianconi et al. [2009]) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  7. 7. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Still a very controversial project A very controversial project... Cameron (ex British Prime Minister) : ”And then theres the proposal for a Financial Transactions Tax... Even to be considering this at a time when we are struggling to get our economies growing is quite simply madness”, idem in Sweden and Holland, Estonia ? Krugman (Nobel Laureate) : ”The economic value of all this trading is dubious at best. In fact, theres considerable evidence suggesting that too much trading is going on it suggests that to the extent that taxing financial transactions reduces the volume of wheeling and dealing, that would be a good thing.” Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  8. 8. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t ...but a few academic papers until recently to clarify the effects of a FTT on finacial activity, macroeconomic volatility Question : What would be the effects of a TT ? Will a tax on financial transactions curb speculative activity and render financial markets more stable ? Or will it hurt market liquidity and price discovery, thus, making markets even more volatile ? Recently however, a renewed interest for this question with a new wave of theoretical and empirical papers on the FTT (often as an equity transaction tax) : Lendvai et al. (2013, JEDC) ; Berensten et al. (2016, EER), Vives (2017, RESTUD), Davila (2017, Econometrica ?) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  9. 9. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Contribution to the literature 1. Aim of my past research : empirically assess the impact of a TT on the Forex working ⇒ 1.1 estimate the influence of a TT on trading volume ⇒ 1.2 estimate the influence of a TT on instability (check if this effect is uniformly distributed across the different Forex regimes (high appreciation of the Euro, low volume trading, financial crisis etc) ? ⇒ I will only focus here on the results of my Macroeconomic Dynamics paper (2016) for time considerations and on the Forex (seminal project from Tobin, scarcity but the same methodology) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  10. 10. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t 2. Project in progress with K. Sobczak (Poznan) and questions to investigate further ⇒ which impact on financial and macroeconomic volatility ? ⇒ optimal tax rate and social welfare ? ⇒ contagion and tax coordination issues ? ⇒ need general equilibrium analysis Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  11. 11. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Tobin Tax and Forex 1. Impact of a Tobin Tax on the Forex working Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  12. 12. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Literature Forex Only two existing empirical studies with Forex data ⇒ decentralized nature of the Forex : and thus difficulting to collect data about trading volumes and prices (bid, ask quotations) ⇒ a TT has never been implemented unlike equity and securities transactions taxes Aliber et al. [2003] : futures data (CME), datastream, 1 January 1977 to 31 December 1999 ⇒ an increase of 0.02 percent in spreads following the introduction of the TT leads to an increase in volatility of 0.5 percent points Lanne and Vesala [2010] : Olsen and Associates data, DM-Dollar and Yen-Dollar, 1 October 1992 to 30 September 1993 : intraday and daily regressions lead to same conclusions Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  13. 13. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Shortcomings ⇒ Aliber et al. used aggreagated futures data but there is no link between spots and futures on the Forex (Hartmann [1998]) ⇒ Only 3% of total Forex turnover, centralized futures less liquid ⇒ Evidence that changes in transaction costs cause reductions in volatility and increasing volume and liquidity. But the direction causality may be the reverse (reductions in volatility lead to higher liquidity and lower trading costs). Measure of fundamental volatility (news). ⇒ Data set from Lanne and Vesala is obsolete (data from 1992-93), only linear framework Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  14. 14. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t A new Framework Concentrate on the volatility/volume instead volatility/spread (endogeneity bias because of two-way causality) Volume is weakly exogenous, better understand of the transmission chanels running from the TT to volatility Assumption refering to Jeanne and Rose [2002], Haberer [2004] : the TT effect is conditional on the size and depth of the market as well as on the structure of the trading volume (NL) Tobintax → Volume → Volatility volume = α1 + α2spread + Z1,t + 1,t Damette[2008,2016] volatility = β1 + β2volume + Z2,t + 2,t MDH Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  15. 15. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t TT and trading activity Transaction costs (spread) used as a proxy of a TT to assess the impact of a TT on the trading volume Estimation with daily data from Olsen and Associates data : significant but smaller reduction of the trading volume about 15 to 40% (ARIMA, GARCH, 3SLS-GMM system) System to take into account potential endogeneity issues in the estimates, in line with the seminal paper from Demos and Goodhart (1996) Some robustness checks (specifications, instruments) : elasticity is between -0.15 and -0.40 for the Euro/Dol over 2008-2010 with daily data (2006-2012 robustness) Consistent with another paper (Bismans and Damette, 2008, IE) with actual(not tick by tick) intraday data (original data set from Reuters) on several major currency pairs (TS and panel cointegration) : -0.3 to -0.6 Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  16. 16. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t    ln(volume)t = β1 + β2 ∗ ln(spread)t−k + β3 ∗ ln(volume)t−k + β4 ∗ ln(voly)t−k + 1 ln(voly)t = β5 + β6 ∗ ln(spread)t−k + β7 ∗ ln(volume)t−k + β8 ∗ ln(voly)t−k + 2 ln(spread)t = β9 + β10 ∗ ln(spread)t−k + β11 ∗ ln(volume)t−k + β12 ∗ ln(voly)t−k + 3 (1) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  17. 17. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  18. 18. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  19. 19. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t The volume of the market would decline by 24% if a tax level would lead to an increase of 100% of the transactions costs (spreads) actually at work on the market (tax of few basis points 0.02% for instance) ⇒ Implications Lead to a better evaluation of the potential revenues of a TT since elasticity of the volume to the tax give us the tax base Lead to a better understanding of the impact of a TT on instability since volume and volatility are linked (2d question of this seminar) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  20. 20. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Tobin Tax and Volatility Question tackled : is the market speculative and with irrational exuberance (Shiller) or is the market efficient (Fama) ? Is it the sign that the market is too volatile, characterized by lot of high trading frequence, speculative motivations in line with Tobin and Keynes ? Or not ? Is a FTT suitable to reduce the financial instability and the probability of a future crisis ? We try to assess this question by linking reduction of trading volume and volatility via the MDH hypothesis Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  21. 21. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t A wide range of theoretical studies Wide range of theoretical studies ⇒ heterogeneous agent models based on market microstructure : coexistence of fundamental/chartist and informed traders (Frankel and Froot [1990], Jeanne and Rose [2002]) and (Frankel [1996], Shi and Xu [2009]) ⇒ simulation models of intercative agents (Ehrenstein et al. [2005], Westerhoff and Dieci [2006], Pellizzari and Westerhoff [2009] through the use of ”‘zero intelligence”’ models ⇒ laboratory experiments (Bloomfield et al. [2009], Hanke et al. [2010]) ⇒ minority games (Bianconi et al. [2009]) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  22. 22. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  23. 23. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Heterogeneous agent models (Jeanne and Rose [2002], Shi and Xu [2009] by introducing a Tobin Tax) ⇒ Noise and informed traders : the volatility is driven by the proportion of noise who use technical analysis or have misinformation ⇒ Benchmark model interesting because it mixes elements from the macro theory of ER and the noise trading approach by modelling traders’ heterogeneous expectations and micro optimization portfolio ⇒ ER volatility as a function of fundamental (macro from informed traders) and excess volatiltiy (noise traders) Salient output from their model ⇒ Derivation of 3 possible equilibria with low to high entry by noise and thus low to high excess volatility ⇒ Different levels of aggregate volatility for the same levels of fundamental volatility : multiple equilibria (traders have two counteracting roles), Tobin Tax ? Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  24. 24. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Introducing NL in the Volatility/Volume link Threshold and non linear effects have been neglected by existing studies ⇒ Jeanne and Rose [2002] and Shi and Xu [2009] prove analytically the existence of a U shape between volume and volatility ⇒ Simulation models and laboratory experiments : the TT effect is dependent on the market size, see also Haberer [2004] Mixture distribution may occur only above or below certain levels of volume activity (and volatility) ⇒ Olsen Financial Technologies data, 1 October 2006 to 31 October 2010 volt = t=1 T [log(Rt /Rt−1)]2 Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  25. 25. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  26. 26. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  27. 27. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  28. 28. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t A Smooth Transition Regression Mixture distribution may occur only above or below certain levels of volume activity (and liquidity) ⇒ STR modeling, Ter¨asvirta [1994, 1998], Franses and Van Dijk [2000], Ter¨asvirta and Franses [2002] ⇒ STR-GMM, Areosa et al. (2011), Brueggemann and Riedel (2011) : changing set of instruments, initial condiitions but qualitative properties remained consistent ⇒ volt = β1zt + β2zt G(γ, c, st ) + ut zt = (wt , xt ) , wt = (1, yt−1, ..., yt−p) G(γ, c, st ) = 1 + exp −γ K k=1(st − ck −1 Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  29. 29. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Results Main results 1 ⇒ The MDH is stronger in periods of high trading volume (evidence of NL) ⇒ The semi-elasticity of the trading volume increases from 0.506 to 1.732 (increasing role of the information on the volatility dynamics) when the lagged trading volume exceeds an estimated threshold of 12.41 ⇒ Exploring the historical trading volumes data and comparing them to threshold values of the transition variable : the non linear regime (strenghting relation) occured at the November to December 2008 period (ensuing from the Black October) ⇒ Also applies in the last part of the sample (April to October 2010) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  30. 30. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Main results 2 ⇒ Automn 2008 was a period with very high Forex volume and activity ⇒ A calm period from the end 2008 to the spring 2010, slowing down of the Forex with smaller trading volume and a narrower volatility volume correlation ⇒ A final non monotonic period (April to October 2010) ⇒ Results in constrast with Galati [2000] : positive during normal times but negative in stress periods (emerging) ⇒ Our results need to be qualified : why MDH is increasing in high trading and volatility periods ? Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  31. 31. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Main results 3 ⇒ The first period, spreads were particularly high, high volume and volatility, crisis period (gloomy situation in the wake of the Black October) : News about US depression, European recession, ECB decisions about interest rates and recovery plans... ⇒ In crisis period, each trader want to get out its postions, leading to large volume ⇒ The second period of increasing MDH seems to be of different nature : volume was unnaturally high and spreads remained moderate ⇒ The surge in the volume (May-August) 2010 : large deprectiation of the Euro caused by the eruption of the sovereign debt crisis (wave of speculation against the Euro) ⇒ The last period is somewhat different : optimistic expectations and high-risk positions regarding the US recovery Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  32. 32. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  33. 33. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  34. 34. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  35. 35. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Policy implications A tax would be on average an effective instrument for reducing Forex volatility (MDH) in contrast with the two previous empirical studies but in accordance with lot of theoretical papers. All other things beign equal (with constant elasticity), a tax would have a higher marginal effect for reducing volatility when the volume and volatility are abnormally high (higher semi-elasticiy in the non linear regime) as in automn 2008 and spring 2010. Valuable tool in times of boom trading volume and turbulent period. Results are consistent with Tobin [1974, 1978] and with the right-hand part of the U-shape of the Jeanne and Rose (2002) model : increasing volume is accompanied by an increase in the number of the noise traders and in the excess volatility. Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  36. 36. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Limitations and robustness Assumption : If the proportion of noise traders is constant or increasing, then as the volume increases, so too the number of noise traders and the MDH becomes more highly correlated. Our analysis could be biased if the trading volume become endogenous in times of crisis (a two-way causality between volume and volatility) Whe check it by implementing Granger causality tests on different sub-samples refering to the linear and non linear parts detected by the model Evidence of unidirectionnal causality from trading volume to volatility only in the second turbulent period (390-515) but no causality link in the calm period (150-350) and causality from volatility to volume in the first part (1-50) To go further : a longer period and other data sets and a better treatment of simultaneity issues (STR-VAR) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  37. 37. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Table 7. Granger causality tests (p-values) Sample Causality p=1 p=2 p=3 1-50 (1st linear part) Volume Volatility→ 0.6373 0.3537 0.4265 1-50 Volatility Volume→ 0.3937 0.1150 0.0089 150-350 (linear part) Volume Volatility→ 0.3350 0.5798 0.7733 150-350 Volatility Volume→ 0.6750 0.7404 0.7894 390-515 (2d non linear part) Volume Volatility→ 0.0021 0.0066 0.0209 390-515 Volatility Volume→ 0.9963 0.8052 0.9289 Note: → denotes no causality for order p. To test the granger causality from volume to volatility, we consider the following model, for i=Euro/Dollar, Euro/Yen: ( ) ( )0 , , 1 1 p p t j i t j j i t j t j j Volatility Volatility p Volume p uφ φ α− − = = = + + +∑ ∑ for 1p ≥ . The null hypothesis is: 0 1: ... 0pH α α= = = . Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  38. 38. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Comparison with recent empirical studies about FTT impact on volatility : New study using Euronext 100 and 150 from Capelle-Blancard G. O. Havrylchyk, 2017, The impact of the French securities transaction tax on market liquidity and volatility, International Review of Financial Analysis, French and Italian FTT, interesting to conduct some field experiments France : tax of 0.2% on acquisitions of French equity securities and similar instruments (companies whose headquarters are located in France and with market values of more than 1 billion Euros on January 1st of the year of taxation) no effect of equity transaction tax on volatility in France or weak effect... ...but a tax on 109 companies and no tax on high frequency trading ! Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  39. 39. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  40. 40. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Project in progress : a new DSGE model 2. A GE analysis of the FTT effects (in progress, with K. Sobczak) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  41. 41. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Project in progress : a new DSGE model Scarcity of social welfare and general equilibrium analysis to investigate the global effects of a FTT (not only on Forex but equities, derivatives...) Only one DSGE from Lendvai, Raciborski and Vogel (2013, JDEC and European Commission) but in a closed one country economy with no tax evasion issues, no tax competition issues and with quite exogenous financial noise trading Challenge : a 2-country model to assess financial contagion, tax evasion and capital flows between two zones (Tobin and not Tobin) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  42. 42. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Special features of our framework A financial intermediary/bank/trader that collect deposits from households and invest these funds into corporate equities A part of traders are noise traders (heterogeneity) Noise traders have noisy expectations about shock equity returns and may deviate from rational expectations (De Long et al., 1990) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  43. 43. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Special features of our framework In a one country model, the FTT will directly reduce noise trade through which financial and, indirectly, real volatilities are affected. But in a 2 country model, what about the contagion of financial and real volatilities ? In a one country, an FTT will increase the capital cost of the firms, reduce physical investment, GDP but also financial volatility. The financial volatility decreasing has little impact on the volatility of real variables but in a global model, we expect higger effect of FTT on volatilities Indeed, we can introduce some contagions from noise traders expectations/shocks in one country to expectations from noise traders in another country (see equations) In addition we endogeneize the part of noise traders by introducing an utility threshold (to enter ou not in the equity market) ; that would amplify boom-bust behaviour and dynamics Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  44. 44. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Special features of our framework Equity market demand(sum of portfolios) equal to supply : nt SNt + (1 − nt )SIt = St Trader maximizes its discounted wealth value : MaxSj t ,SFj t Ej t β δt+1 δt NWj t+1 Wealth’s intermediary dynamics over time with FTT : NWt+1 = (PS t+1 + Divt+1)St + (et+1PFS t+1 + et+1DivF t+1)SF − Rt Ft − τFTT f(Pt St − et (1 − s∗ n) − et τFTT f(PFS t SF t ) Balance of the j intermediary : PS t Sj t + et PFS t SFj t = NWj t Noise traders expectations of future discounted returns :domestic equities EN t β δt+1 δt [RS t+1] = EN t β δt+1 δt [RS t+1evR t ] Idem for foreign equities EN t β δt+1 δt [et+1RS t+1] = EN t β δt+1 δt [et+1eve t RFS t+1evRF t ] Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  45. 45. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Special features of our framework Optimal portfolio of intermediaries : SI t = EI t RS t+1 2τFTT NPS t + S F SFI t = EI t et+1RFS t+1 2et τFTT NPFS t + S SN t = EN t RS t+1 2τFTT NPS t + S SFN t = EN t et+1RFS t+1 2et τFTT NPFS t + S F Sum of portfolios in endogeneous case : nt (SN t + SFN t ) Noise + (1 − nt )(SI t + SFI t ) Informed = St + SF t DomE+ForeignE Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  46. 46. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Special features of our framework Endogeneity of noise intermediaries : ci entry cost paid only paid by noise ones (like in Xu’s paper) c∗ t : cut-off value of entry cost depends on how far are noise expectations from rational and noise portfolios from average ones c∗ t increases if noise portfolio is far from average and bigger c∗ t decreases if noise portfolio is far from average and smaller 26 equations per country (+4 in endog. case), steady state and computations Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  47. 47. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Expected results In the way of the HOS model in international economics in which through traded goods, productions factors are also implicitly traded across countries, we expect that through international equities flows, some noise traders can move from one country to another one and change the effects of noise trading and so the effects of a FTT on volatility across countries For example, a noise trader in France might move in Estonia and can increase volatility in Estonia and thus instability Finally, in a 2 country DSGE considering traders flows and contagion effects, we can investigate in which conditions, it would be interesting to stay out the taxed zone or not In the short run, it could be interesting for a country to be out the FTT zone but maybe in the long run, the FTT could dampen the volatility in the taxed zone and increase it in the other zones (like in UK and Estonia) Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  48. 48. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Conclusion Tobin Tax or FTT is not a so bad idea... Generate revenues, decrease the noise trading behaviour in financial markets and no or small positive effect on volatility But social welfare, optimal taxation and coordination issues need to be investigated Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest
  49. 49. Brief Vitae Brief Vitae Motivations and the story of the FTT project Motivations and the story of the FTT project Motivations and t Thank you for your invitation and your attention Olivier Damette Taxing the Financial Transactions in Europe : new empirical invest

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