Effect of transaction tax on the relationship between volatility and trading activities of Taiwan stock index futures
Authors: Chia-Pin Chen, Ying-Sing Liu, Jen-Wei Yang
Journal: Chiao Da Management Review. Dec. 2010, 30(2): 61-105.
Keywords: Index futures; Transaction tax; Flexible fourier form; Volatility; Speculative trading activities
Abstract:
This paper examines the impact of the reduction of futures transaction taxes on the correlation between return volatility and trading
activities of nearby contracts of the four stock index futures, i.e. TX futures, MTX futures, TE futures and TF futures on the Taiwan Futures
Market. (The Taiwan futures transaction tax was lowered from 0.025% to 0.01% on January 1, 2006.) This paper considers the effects of time
trends and seasonal factors on retum volatility and trading activities by performing individual tests with Flexible Fourier Form (FFF)
developed by Luu and Martens (2003). Meanwhile, this paper incorporates FFF into the two-equation structural model, which consists of the sum
of intraday retum volatility and trading volume (speculative trading activities) in order to test transaction taxes, time trends and seasonal
effects. The research covers the period starting on July 1, 2004 through June 31 , 2007. It performs an empirical analysis with daily and
5-minute intraday time series data. The result shows that there are variances in the effects of transaction taxes on the four futures. The
trading volumes of TX futures, MTX futures and TE futures increased significantly after tax reductions; whereas the trading volume of TF
futures fell markedly. This may be due to speculative trading activities. This paper also finds that after tax reductions, the speculative
trading activities of these four futures dramatically picked up after tax cuts. Meanwhile, some studies indicate that the reduction of
transaction taxes results in an increase in futures retum volatility. Finally, we find that the trading activities of the four futures show
time trends and seasonal effects.