Monday, September 09, 2013

Speculative Investors and Tobin's Tax in the Housing Market

Speculative Investors and Tobin's Tax in the Housing Market:  Interesting support here for the notion that speculators provide liquidity and assist in the process of price discovery.

"This paper examines the impact of a policy change in Tobin’s tax on housing market speculators. The policy intervention effectively raised the transaction cost in the market segment with a high presence of speculators. Relative to the unaffected control sample, we find that the rise in transaction cost substantially reduced speculative trading activities in the treatment sample. However, it significantly raised its price volatility and reduced the price informativeness. We further show that the unintended consequences are likely due to a relatively greater withdrawal by informed speculators than by destabilizing speculators after the transaction cost increase."

There is an interesting addition with the finding that informed speculators disappeared more than those that they deem destabilising.  The authors use the fact that speculators in the housing market cannot short the market to assert that there must be more informed speculators in markets where houses were undervalued than where they were over-valued.  This is identified by future price performance and it is found that there is a greater volume decline in those areas that were under-valued than those that are over-valued.

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