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We thank Stefan Ingves for suggesting the topic, Tomás Baliño, and Richard Lyons for helpful comments.
For example, Eichengreen, Tobin, and Wyplosz (1995) argue that “transaction taxes are one way to throw sand in the wheels of super-efficient financial vehicles.”
Officially, the extension of the tax to fixed-income instruments was supposed to achieve “neutrality” with the tax on equity transactions. See Campbell and Froot (1995).
By contrast, tobacco taxes accounted for 1.26 and 1.37 percent of the total revenue collected in 1987 and 1988, respectively.
The statistics are calculated by taking the participation rates reported in the paper as a fraction of 50 percent, the rate which implies that the market maker is a counterparty to all trades.
Reinhart (2000) argues that the introduction of STTs may also make asset prices more variable in the general equilibrium setting.
Leland (1985) develops an extension to the Black-Scholes continuous-time model and shows how to modify the variance in order to price call options in the presence of transaction costs. In Leland’s model, the variance inceases in the presence of transactions costs, reflecting the discontinous rebalancing of portfolios necessitated by transactions costs.
For tractability, we assume that at least one asset is unconstrained, so that available funds could always be allocated among the given instruments.
Formally, we must prove the existence of a mapping from the set bounded by the unrestricted efficient frontier to the set bounded by the restricted efficient frontier such that the mapping is linear in the mean.
For simplicity, we assume that the variance-covariance structure is not affected by the presence of transaction taxes.
The rationale for the imposition of the stamp duty and SDRT on the purchasing and not the selling party was that only the purchasing party has the need to prove the legal title to an asset in the event of a dispute.
The stamp duty is also levied on property-related transfer of legal ownership. The amount collected from property-related transactions during the 1998–99 fiscal year was approximately 2.5 billion pounds.