Abstract
This study examines the impact of a stamp tax rate increase on market behavior, using data from two stock exchanges in China. We find that when the tax rate increases from 0.3 to 0.5% (which implies that the transaction cost increases by about 1/3) trading volume decreases by 1/3. This implies an elasticity of turnover with respect to a stamp tax of −50% and an elasticity of turnover with respect to transaction cost of −100%. The markets’ volatility significantly increases after the increase in the tax rate. Furthermore, the change in the volatility structure indicates that the markets become less efficient in the sense that shocks are less quickly assimilated in the markets.
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Notes
RMB, or Renminbi, is the local currency. In recent years, including the sample period in this study, the exchange rate has been very stable with one US dollar being around RMB 8.3, fluctuating less than 0.05.
For many brokers, there is no other fee. Some brokers charge some fees. For example, one broker charges RMB 4 (equivalent to less than US$0.5) for every order.
We thank an anonymous referee for pointing this out.
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Acknowledgements
We would like to thank the editor Robert Kunst and two anonymous referees for their helpful comments and suggestions that greatly improved the study. We also would like to thank Lu Mao at Wuhan Academy of Social Science, Qiang Qin, Deputy Manager at Wuhan Securities Branch of China Economic Development Trust Investment Co., Jin Yao at Wuhan Securities Branch of Jiangxi Agricultural Bank, and Yinxiang Zhang, Director of Supervisory Department at Shenzhen Branch of Hubei Securities Investment Co., for insightful discussions and comments. Special thanks go to Doug Owens for helpful comments. B. Baltagi and Q. Li’s research were partially supported by the Private Enterprise Research Center, Texas A&M University.
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Baltagi, B.H., Li, D. & Li, Q. Transaction tax and stock market behavior: evidence from an emerging market. Empirical Economics 31, 393–408 (2006). https://doi.org/10.1007/s00181-005-0022-9
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DOI: https://doi.org/10.1007/s00181-005-0022-9