Turnover Tax and Stock Return Volatility: Recent Experiments from Asia Countries

Global financial turmoil in recent years has resulted in renewed interest in taxing financial markets. Advocates believe that the tax would penalize noise trading and thus contribute to the stability of the market, while opponents argue that the tax would hurt stability, by penalizing noise traders and rational traders equally. In view of these policy and academic discourses, concentrating on stock trading, this paper empirically examines whether levying a turnover tax would increase or reduce the price return volatility. To do so, given the increasing importance of Asia-Pacific countries in the world economy, we investigate recent tax reform episodes in those countries, using a GARCH and its variant models, as most of the advanced economies already abolished the tax many years ago. Overall, the estimation yields evidence that the turnover tax did not reduce volatility, in line with findings of earlier studies based on more advanced economies.