Work detail

The Impact of the Tobin Tax in a Heterogeneous Agent Model of the Foreign Exchange Market

Author: Bc. Filip Staněk
Year: 2014 - summer
Leaders: PhDr. Jiří Kukačka Ph.D.
Consultants:
Work type: Bachelors
Language: English
Pages: 52
Awards and prizes: B.A. with distinction from the Dean of the Faculty of Social Sciences for an excellent state-final examination performance and for an extraordinarily good bachelors diploma thesis.
Link: https://is.cuni.cz/webapps/zzp/detail/137315/
Abstract: In this thesis, we assess the impact of the Tobin tax on key statistics of exchange
rate returns with use of a heterogeneous agent based model. The answer to
the question of how transaction costs a ect exchange rate dynamics is not only
interesting from a theoretical point of view but also has practical implications
as several regulators are contemplating imposition of such a tax nowadays.
Motivated by the recent research showing the great importance of the mar-
ket micro structure, we choose to explore the impact of the tax in a market
cleared by the Walrasian auctioneer. This settings, as we argue, could resem-
ble the two layered structure of the real foreign exchanges more closely than
a price impact function which is often adopted in studies regarding the Tobin
tax. To assess the impact of the tax, we extend the model of De Grauwe &
Grimaldi (2004) by the inclusion of transaction costs. The original model con-
sists of boundedly rational agents who use a blend of fundamental and technical
analysis to predict the future exchange rate. An ongoing competition between
the forecasting rules creates chaotic price movements not dissimilar to the ones
observed in the real foreign exchanges.
We use computational methods to assess the e ect of the Tobin tax within
the model and nd that the Tobin tax is capable of reducing distortions and
kurtosis of returns. The e ect of the tax on volatility is more intricate. We
found that for small values of the tax (0%{0.3%) it negligible increases volatility
while for larger values (0.3%{1%) the tax can deliver a decrease of volatility
by up to 10% in the case of a 1% tax. Results are robust with respect to the
volatility of the fundamental value. In addition, our simulations indicate that
the Tobin tax is able to prevent from occurrence of speculative bubbles.

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