ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Effects of the Securities Transaction Tax Cut on Liquidity and Volatility：Evidence from South Korea

  • Sang-Yeob Lee Korea Institute of Public Finance

Asian Tax Journal Vol. 21 No. 6 (2020), pp. 123-154

Abstract

The Korean government has lowered the securities transaction tax from June 2019 to revitalize the stock market by easing the tax burden on investors. This paper examines the effects of the securities transaction tax cut on the trading activity, liquidity, and volatility of the stock market. To estimated the effects of the securities transaction tax cut in June 2019, I employ the Difference in Difference(DID) methodology after controlling a stock fixed effect and a time fixed effect using panel data of the stocks included in the KOSPI200 index and NIKKEI225 index and top 200 stocks by market capitalization of KOSDAQ and JASADQ respectively from March 2019 to September 2019. The results show that after the tax cut, in the KOSPI200 market volatility increased without any change in trading activity (transaction volume, trading value, turnover). However, the degree of increase in volatility is very slight. Meanwhile, I found that trading value and volume increased by 29% and 31%, respectively after the securities transaction tax cut in the KOSDAQ market. However, the degree of increase in volatility was found to be very slight. In order to check the robustness, the analysis was performed including the announcement effect first, and then the analysis period was changed. All results of the robustness check showed similarity in the size of coefficients and their statistical significance with those of the main analysis. These results do not support the claim that the securities tax cut will increase liquidity, improve the efficiency of the market's price discovery function and reduce volatility.

Keywords

  • securities transaction tax
  • trading volume
  • liquidity
  • volatility
  • tax rate cut

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Asian Tax Journal

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