Re: Volatility

["John O'Donnell" <jackodonnell@xxxxxxxx>]

"J. Barkley Rosser, Jr." wrote:
>
> Paul,
>       I don't wish to reopen old controversies here, but I
> would say that the evidence you cite suggests that there
> may have been cases where such taxes increased volatility
> rather than decreased it rather than that such taxes ALWAYS
> increase such volatility.  Not everybody accepts the conclusions
> of those studies and they are hardly comprehensive.

While I have not read Paul's argument as to why stock
transaction taxes increase  volatility as measured by
variance it is obvious that they probably would.

Take any sample of transaction data and remove the instances
of smallest difference between the buy and sell price and
the obvious result is the variance will be higher. The
obvious effect of a transaction tax on stock trades is that
there will be fewer trades and it is the least volatile
stocks that will not trade as often. Also, traders dealing
with the more volatile stocks will need a larger difference
in the buy - sell prices in order to justify trading.

While an actual sampling of trading data may demonstrate
either greater or lesser volatility, the impetus is
obviously towards greater. However, that still does not mean
that taxes of types other than transaction taxes can not
decreases volatility, and the monopoly tax I present in
_Three Steps, etc._ do so without affecting trading volume.

>       I would note, however, that there does not appear to be
> any necessary virtue in terms of avoiding volatility to be gained
> by "slowing down" market behavior.  In particular I am thinking
> about what happens during panics.  It is well known, both from
> 1929 and from 1987, that during serious crashes, the tendency
> to panic and extreme behavior increases when people are unable
> to finalize transactions quickly and do not know what is happening.
> This tends to lead to extreme selling behavior out of the panic of
> uncertainty that becomes a self-fulfilling prophecy of a severe crash.

I quite agree that there would be little to be gained by
slowing down transactions during "normal" behavior. [i.e. --
Absent panic behavior.] However, the use of such techniques
as program trading curbs and temporary halts in trading
activity to allow panic behavior to dissipate do seem to me
to be desirable.

As to the further concern of "market bubbles" with or
without volatility, the preferred choice would be to
discourage the bubble in the first place. A transaction tax
will not do this but a progressive tax on the total value of
a corporation would tend to decrease the tendency.

<<SNIP>>

--
			-- jbod

		Tax Privilege, Not People
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