Security transaction taxes and financial volatility: Athens stock exchange

Abstract

The study examines the effects of security transaction tax on volatility. It focuses on whether the tax has a greater effect on highly traded stocks since it penalizes entering and exiting the market and on whether it depends on the state of the stock market. The results highlight the differential effect of transaction tax on volatility during bear and bull periods casting doubts on the findings of previous studies, which did not allow for that. The effects are stronger for highly traded stocks and during bull periods but volatility increases instead of falling as intended by the proponents of transaction taxes.

Notes

¹ See, for example, Tobin (1984), Summers and Summers (1989), Stiglitz (1989) and Eichengreen et al. (1995) for a discussion of the various arguments put forward in favour of STTs.

² See, for example, Campbell and Froot (1995), where they consider international experiences with STTs.

³ For a description of STTs that have operated in developed economies, see Habermeier and Kirilenko (2001).

⁴ It should be noted that Greece was upgraded by the Morgan Stanley Capital International (MSCI) from the emerging market index to the developed market index on 31 May 2001.

⁵ The FTSE/ASE 20 Index consists of 20 of the largest in market capitalization and most liquid stocks that trade on the ASE. It was developed in September 1997 out of a partnership between the ASE and FTSE International.

⁶ Hardouvelis and Theodossiou (2002) also investigated the possible existence of an asymmetric relation between initial margin requirements, which is another form of transaction cost, and stock market volatility in the US during bull, normal and bear periods.

⁷ A few studies have examined the effect on trading volume. See, for example, Campbell and Froot (1995) who examine the experiences of Sweden and UK and find a fall in trading volume in the presence of STTs.

⁸ Roll (1989) reviewed three proposals for dampening volatility: margin requirements, circuit breakers, and transaction taxes, and claimed that transaction taxes are the least studied of the three.

⁹ Hau (2006, p. 888).

¹⁰ There was an additonal tax rate reduction on stock transaction from 0.3% to 0.15%, which was implemented in January 2005. The tax reduction was announced as part of the tax reforms included in the Government's annual budget, and the move intended to further enhance the stock exchange's prospects. It is worth noting that the latest tax rate change falls outside our sample period.

¹¹ For a detailed explanation of ARCH models see Bera and Higgins (1993).

¹²In essence, normal periods in this case refer to the full sample.

¹³ Kavussanos and Phylaktis (2001) have also tested for the leverage effect using the EGARCH formulation of Nelson (1991). They examine the interaction of stock returns and trading activity in the ASE under different trading systems.

¹⁴ Daily closing data for the FTSE/ASE 20 Index is available since the establishment of this large cap index on 24 September 1997.

¹⁵ The price indices are not adjusted for dividend payouts. Schwert (1990) and Gallant et al . (1992) show that volatility estimates are not influenced appreciably by dividends.

¹⁶ The figure includes companies whose shares have been suspended from trading.

¹⁷ We use EGARCH-M (p,q) modelling to examine the relationship between transaction tax and the conditional moments–mean and variance–of daily stock market returns, since the leverage effect coefficient has been found to be statistically significant at the 5% level.

¹⁸ Lo and Mackinlay (1988) discuss the effects of nonsynchronous trading on autocorrelations. Their view is that since small capitalization stocks trade less frequently than larger stocks, new information is absorbed first into large capitalization stock prices and then into smaller stocks with a lag. This lag induces a positive serial correlation.

¹⁹ See Kohers and Kohers (1995) and Mills et al . (2000) for the case of the Greek capital markets.

²⁰ See Booth et al . (1997).

²¹ See Fig. 1 for developments in the stock market over this period. As it can be seen, the All Share Index and the FTSE/ASE 20 Index reached their all time highs of 3067.04 points and 3301.69 points (closing prices) on 13 October 1999 and 20 September 1999, respectively. The stock market followed a downward trend thereafter.