Question

If a tax were put on stock market transactions, it would probably substantially reduce trading. What would you expect it to do to volatility of individual stocks and stock indices?

Answer 1

If a tax were put on stock market transactions, it would probably substantially reduce trading as people will not trade until they earn a positive return on their investment.Taxing transaction shoild also reduce speculative trading activities,Speculative trading provide higher return with high risk.So,taxing transactions further increase the risk associated with speculative trading activities.Thus tax is expected to reduce trading volume by controlling short term speculative tarding.It is expected to promote investors to do a long term assessment for stock and invest for a long term.

We know that volatility is the deviation of in prices of stocks and indices.Standard deviation is measure of volatilty. So volatility quantifies the fluctuations in stocks prices and indices.Since trading activities are expected to reduce,the fluctuations in stock prices is expected as a result.Reduced fluctuations result in reduce deviation of stock prices.Hence standard deviation and volatility is expected to reduce as a result of imposition of taxes on transactions.