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MIXTURE DISTRIBUTION HYPOTHESIS AND THE IMPACT OF A TOBIN TAX ON EXCHANGE RATE VOLATILITY: A REASSESSMENT

Published online by Cambridge University Press:  26 October 2015

Olivier Damette
Olivier Damette*
Affiliation:
Université de Lorraine
*
Address correspondence to: Olivier Damette, Faculté de Droit et de Sciences Economiques, Université de Lorraine, BETA-CNRS, and LEF-INRA, 13 place Carnot, 54035 Nancy Cedex, France; e-mail: [email protected].
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Abstract

This paper applies smooth transition regressions to incorporate nonlinearity into the impact of trading volume on exchange rate volatility, the so-called mixture distribution hypothesis (MDH). Linking this analysis to the Tobin tax debate, we provide the first empirical corroboration that such a tax may be effective in limiting speculation and reducing exchange rate volatility, especially in turbulent times. Our study points to two main results. First, we show that nonlinearities should be taken into account to explain the MDH. When volatility, spreads, and volume are simultaneously high, the relationship between trading volume and volatility tends to grow stronger and thus the MDH holds in turbulent periods. Second, on the assumption of constant trading volume elasticity, a Tobin tax would have been stabilizing and effective in the 2008 crisis.

Keywords

Tobin TaxExchange Rate VolatilitySTR ModelsNonlinearityMixture Distribution Hypothesis
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 6 , September 2016 , pp. 1600 - 1622
Copyright
Copyright © Cambridge University Press 2015 

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