Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212036 
Year of Publication: 
2006
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 11/2006
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We argue that a transaction tax is likely to amplify, not dampen, volatility in the foreign exchange markets.Our argument stems from the decentralised trading practice and the presumable discrepancy between informed and uninformed traders valuations.Since informed traders valuations are likely to be less dispersed, a transaction tax penalises informed trades disproportionately, leading to increased volatility.Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM/USD and JPY/USD returns. High-frequency data are used and an increase in transaction costs is found to have a significant positive effect on volatility.
Subjects: 
transaction tax
exchange rates
volatility
JEL: 
F31
F42
G15
G28
Persistent Identifier of the first edition: 
ISBN: 
952-462-280-7
Document Type: 
Working Paper

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