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Mixture Distribution Hypothesis And The Impact Of A Tobin Tax On Exchange Rate Volatility: A Reassessment

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  • Damette, Olivier

Abstract

This paper applies smooth transition regressions to incorporate nonlinearity into the impact of trading volume on exchange rate volatility, the so-called mixture distribution hypothesis (MDH). Linking this analysis to the Tobin tax debate, we provide the first empirical corroboration that such a tax may be effective in limiting speculation and reducing exchange rate volatility, especially in turbulent times. Our study points to two main results. First, we show that nonlinearities should be taken into account to explain the MDH. When volatility, spreads, and volume are simultaneously high, the relationship between trading volume and volatility tends to grow stronger and thus the MDH holds in turbulent periods. Second, on the assumption of constant trading volume elasticity, a Tobin tax would have been stabilizing and effective in the 2008 crisis.

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  • Damette, Olivier, 2016. "Mixture Distribution Hypothesis And The Impact Of A Tobin Tax On Exchange Rate Volatility: A Reassessment," Macroeconomic Dynamics, Cambridge University Press, vol. 20(6), pages 1600-1622, September.
    • Handle: RePEc:cup:macdyn:v:20:y:2016:i:06:p:1600-1622_00
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    Cited by:

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    2. Veryzhenko, Iryna & Harb, Etienne & Louhichi, Waël & Oriol, Nathalie, 2017. "The impact of the French financial transaction tax on HFT activities and market quality," Economic Modelling, Elsevier, vol. 67(C), pages 307-315.
    3. Koubaa, Yosra & Slim, Skander, 2019. "The relationship between trading activity and stock market volatility: Does the volume threshold matter?," Economic Modelling, Elsevier, vol. 82(C), pages 168-184.
    4. Naďa Blahová, 2013. "About Draft on Financial Transaction Tax [Nad návrhem daně z finančních transakcí]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2013(4), pages 45-54.

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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