Abstract
In this paper we discuss the effects of a Transaction Tax on an artificial market with varying liquidity where a large number of agents can trade a share of a risky asset. A market maker is in charge to optimally set the level of taxation in order to obtain a desired mixture of activity and volatility. We show that, depending on the liquidity of the market, two possible regimes of optimal taxation emerge: a non-negligible level of taxation for highly liquid markets and low (close to zero) levels of taxation for low liquidity markets. This outcome resembles the two-tier rate structure discussed by Spahn in his famous contributions (see [1]).
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- 1.
The idea was, however, clearly present in some texts written by Keynes.
- 2.
We assume that the demand is always fulfilled. The market maker acts as a lender of last resort. We will see that the market maker can tune taxation in order to limit the activity on the market.
- 3.
Although aware of the fact that in real markets liquidity is not constant and, possibly, endogenously influenced by the taxation, in this paper we stick to the simplifying assumption that liquidity is constant in time.
- 4.
The use of a logistic distribution is rather standard for discrete choice models. See [11] for a more detailed discussion about this issue.
- 5.
Market quality is a complex and multidimensional object involving, among other factors, spreads, price stability, high execution rates and low volatility (see for instance, [12]). Consequently, in this model where information is not taken into account, it is reasonable to consider two of the main dimensions involved: volatility and activity.
- 6.
The three values of \(\lambda \) have been selected with the only purpose of showing the variety of possible behaviors arising from the model. Similar values would produce essentially the same results.
- 7.
The reason why we did not see a threshold like \(k_{th}\) in Fig. 2 is that it lies out of the range of values of k used in our simulations.
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Liuzzi, D., Pellizzari, P., Tolotti, M. (2017). Optimality of a Two-Tier Rate Structure for a Transaction Tax in an Artificial Market. In: Bajo, J., et al. Highlights of Practical Applications of Cyber-Physical Multi-Agent Systems. PAAMS 2017. Communications in Computer and Information Science, vol 722. Springer, Cham. https://doi.org/10.1007/978-3-319-60285-1_8
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DOI: https://doi.org/10.1007/978-3-319-60285-1_8
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