Effects of Tobin Taxes in Minority Game markets

TL;DR

Introducing Tobin taxes in agent-based currency market models can decrease speculative trading and exchange rate volatility, especially near critical points, with maximal market maker revenues at intermediate tax levels.

Contribution

This paper demonstrates, using Minority Game models, that Tobin taxes can effectively reduce market volatility and speculative activity, providing insights into optimal tax levels and market behavior.

Findings

Tobin taxes reduce exchange rate fluctuations at intermediate rates.

Market maker revenues peak at certain tax levels.

Effects are strongest near the phase transition of the model.

Abstract

We show that the introduction of Tobin taxes in agent-based models of currency markets can lead to a reduction of speculative trading and reduce the magnitude of exchange rate fluctuations at intermediate tax rates. In this regime revenues for the market maker obtained from speculators are maximal. We here focus on Minority Game models of markets, which are accessible by exact techniques from statistical mechanics. Results are supported by computer simulations. Our findings suggest that at finite systems sizes the effect is most pronounced in a critical region around the phase transition of the infinite system, but much weaker if the market is operating far from criticality and does not exhibit anomalous fluctuations.