Working Paper: CEPR ID: DP10727
Authors: Klaus Adam; Albert Marcet; Sebastian Merkel; Johannes Beutel
Abstract: We present a stock market model that quantitatively replicates the joint behavior of stock prices, trading volume and investor expectations. Stock prices in the model occasionally display belief-driven boom and bust cycles that delink asset prices from fundamentals and redistribute considerable amounts of wealth from less to more experienced investors. Although gains from trade arise only from subjective belief differences, introducing financial transactions taxes (FTTs) remains undesirable. While FTTs reduce the size and length of boom-bust cycles, they increase the likelihood of such cycles, therby overall return volatility and wealth redistribution. Contingent FTTs, which are levied only above a certain price threshold, give rise to problems of equilibrium multiplicity and non-existence.
Keywords: Asset Price Booms; Financial Transactions Tax; Tobin Tax
JEL Codes: D84; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FTTs (F38) | increased likelihood of boom-bust cycles (E32) |
| FTTs (F38) | increased price volatility during normal times (E39) |
| increased price volatility during normal times (E39) | increased likelihood of boom-bust cycles (E32) |
| FTTs (F38) | reduced size and duration of boom-bust cycles (E32) |
| reduced size and duration of boom-bust cycles (E32) | increased likelihood of boom-bust cycles (E32) |
| 4% FTT (F38) | increase by one-third in the number of stock price boom episodes (E32) |