TY - JOUR
T1 - Entry cost, the Tobin tax, and noise trading in the foreign exchange market
AU - Shi, Kang
AU - Xu, Juanyi
PY - 2009/11
Y1 - 2009/11
N2 - Two types of policy have been proposed to eliminate noise trading in the foreign exchange market: increasing the entry cost or imposing a 'Tobin tax' type of transaction tax. In this paper, we endogenize entry decisions of both informed traders and noise traders and show that these policies may be ineffective in reducing exchange rate volatility. This is because these policies will discourage the entry of all traders, so they may not change the relative ratio of traders, or they may affect informed traders disproportionately more, which increases the relative ratio of noise traders and exchange rate volatility.
AB - Two types of policy have been proposed to eliminate noise trading in the foreign exchange market: increasing the entry cost or imposing a 'Tobin tax' type of transaction tax. In this paper, we endogenize entry decisions of both informed traders and noise traders and show that these policies may be ineffective in reducing exchange rate volatility. This is because these policies will discourage the entry of all traders, so they may not change the relative ratio of traders, or they may affect informed traders disproportionately more, which increases the relative ratio of noise traders and exchange rate volatility.
UR - https://www.webofscience.com/wos/woscc/full-record/WOS:000270612400012
UR - https://openalex.org/W2125793408
UR - https://www.scopus.com/pages/publications/70350430166
U2 - 10.1111/j.1540-5982.2009.01555.x
DO - 10.1111/j.1540-5982.2009.01555.x
M3 - Journal Article
SN - 0008-4085
VL - 42
SP - 1501
EP - 1526
JO - Canadian Journal of Economics
JF - Canadian Journal of Economics
IS - 4
ER -