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J Financ Serv Res (2009) 36:6583
DOI 10.1007/s10693-009-0063-x
Shinhua Liu & Zhen Zhu
Received: 8 February 2008 /Revised: 12 January 2009 /Accepted: 2 June 2009 / Published online: 28 June 2009# Springer Science + Business Media, LLC 2009
Abstract We investigate the volatility impacts of the full commission deregulation in Japan in October 1999, and find that the deregulation overall tends to significantly increase price volatility in the Japanese equity market, using alternative model specifications and control variables. This finding contrasts with previous evidence that implies a positive relation between transaction costs and price volatility, while consistent from the converse with the hypothesis proposed by Stiglitz (1989) and Summers and Summers (1989). Our results suggest that imposing higher transaction costs might still be a feasible policy tool for stabilizing the market by curbing short-term noise trading.
Keywords Commission deregulation . Transaction costs . Price volatility . Japan
JEL classification G14 . G15 . G18
Shinhua Liu and Zhen Zhu are grateful to two anonymous referees and Stijn Claessens (the editor) for insightful comments and suggestions, which have led to substantial improvements in the paper. Nonetheless, we are solely responsible for any errors or omissions remaining.
S. Liu
School of Business, Kentucky State University, Frankfort, KY 40601, USA e-mail: [email protected]
Z. Zhu (*)
Department of Economics, University of Central Oklahoma, Edmond, OK 73034, USA e-mail: [email protected]
Transaction Costs and Price Volatility: New Evidence from the Tokyo Stock Exchange
66 J Financ Serv Res (2009) 36:6583
1 Introduction
Explicit transaction costs, such as securities transaction tax (STT) and brokerage commissions, have attracted attentions from policy makers and academics alike, owing to their impacts on market volatilities.1 Yet, there exists no theoretical consensus on the volatility impact of transaction costs. Advocates of the tax argue that such a tax can help reduce excessive market volatility by curbing short-term speculative trading [e.g., Stiglitz (1989), Summers and Summers (1989)]. Critics, on the other hand, contend that an STT could discourage investors from trading frequently and larger price moves would be necessary to induce them to trade profitably, resulting in higher volatility in the capital markets [see, e.g., Grundfest and Shoven (1991) and Kupiec (1996)]. Overall, the opposing arguments leave the volatility impact of transaction costs an empirical matter a priori.