Transaction Taxes and Traders with Heterogeneous Investment Horizons in an Agent-Based Financial Market Model

This  agent-based  financial  market  model  is  a  generalization  of  the  model  of Westerhoff (The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies) by traders who are allowed to have different investment horizons as introduced by Demary (Who Does a Currency Transaction Tax Harm More: Short-Term Speculators  or  Long-Term Investors?).  Our  research  goals  are,  first,  to  study  what consequences the introduction of heterogeneous investment horizons has for agent-based financial  market  models,  and  second,  how  effective  transaction  taxes  are  in  stabilizing financial  markets.  Numerical  simulations  reveal  that  under  sufficiently  small  tax  rates traders  abstain  from  short-term  trading  in  favour  of  longer  investment  horizons.  This change in behavior leads to less volatility and less mispricings. When the tax rate exceeds a certain  threshold,  however,  mispricings  increase  as  also  found  in  Westerhoff (Heterogeneous Traders and the Tobin Tax and The Use of Agent-Based Financial MarketModels to Test the Effectiveness of Regulatory Policies). This emergent property is due to the fact that taxation reduces short-term fluctuations and causes longer lasting trends in the exchange rate. As a result, the longer term fundamentalist trading rule becomes unpopular in favor of the longer term trend-chasing rule.

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Zitierform:
Demary, M., 2010. Transaction Taxes and Traders with Heterogeneous Investment Horizons in an Agent-Based Financial Market Model. Economics 4. https://doi.org/10.5018/economics-ejournal.ja.2010-8
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