Thu, Nov 27, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

EDHEC-Risk Institute warns European Commission of consequences of Tobin Tax

Friday, February 01, 2013
Opalesque Industry Update - In an open letter to European Commission President, José Manuel Barroso on January 30, 2013, Professor Noël Amenc, Director of EDHEC-Risk Institute and Professor of Finance at EDHEC Business School, has reiterated EDHEC-Risk Institute’s opposition to a ‘Tobin’ or financial transactions tax (FTT). Research findings from EDHEC-Risk Institute and other academic institutions show that the theoretical arguments in support of the FTT as a measure to reduce volatility are, at best, mixed; the empirical evidence, on the other hand, indicates that a FTT has either no effect on volatility or it actually increases volatility; and, introducing an FTT faces serious implementation challenges.

In the light of the ongoing discussions on broad implementation of an FTT within the eurozone, EDHEC-Risk Institute points out that reducing the convenience of transactions by increasing taxes:

  • Makes optimal management of long-term investments, which should be dynamic and not static, more costly. This has been shown from more than thirty years of research results, notably those of Robert Merton, Nobel Prize in Economics laureate in 1997, and in the work on the optimal management of risk budgets that EDHEC-Risk Institute has been conducting in recent years as part of its research programme on asset-liability management.
  • Increases the liquidity premium on stocks.
  • Makes markets less efficient and restricts price discovery phenomena.
Ultimately, all these elements would lead to an increase in the risk premium required by investors, including long-term investors, and to a rise in the cost of capital, with a consequential negative impact on economic growth in Europe.

Before seeking to impose a tax on European stocks, EDHEC-Risk Institute recommends that the Commission draw lessons from the recent failed introduction of the FTT in France. The taxed French stocks have recorded an average fall of 15% in volume compared to stocks that were not concerned. “Substitution effects” have occurred between French and foreign stocks from the same sector. Some investors have decided to modify their equity portfolio by underweighting French stocks in favour of non-taxed European firms. This substitution effect will not fail to have consequences on the price of French firms and their capacity to raise capital in order to invest and create employment.

The frequently-mentioned argument that substitution effects would not occur in the case of a tax that is expanded to a wider geographical zone and, as proposed by the Commission, based not only on the location of the transaction or the headquarters of the financial intermediary but also on the primary listing or the nationality of the company, seems to EDHEC-Risk Institute to be irrelevant. It would simply lead to European stocks being disadvantaged in comparison with other geographical regions.

A copy of the open letter can be found here: Source

A copy of the EDHEC-Risk Institute position paper on the Tobin Tax can be found here: Source

Werbsite: www.edhec-risk.com

fg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Investing - George Soros puts $500m of his money on Bill Gross, Soros, Paulson backed Hispania Activos mulls Realia takeover, Ex-Credit Suisse trader’s hedge fund sees yen shorts as crowded, Hedge hunters double default-swaps as views split, Large hedge fund positions come under pressure, Vikram Pandit's fund picks 50% stake in JM Financial's realty lending arm for $87m[more]

    George Soros puts $500m of his money on Bill Gross From WSJ.com: Before Bill Gross was fully settled in at his new firm, Janus Capital Group Inc., he received an unlikely visit from the chief investment officer of famed investor George Soros ’s firm, according to a person familiar with t

  2. Unlucky Paulson & Co. rebrands $1.6bn Recovery Fund after 13% drop[more]

    From Businessweek.com: A maturing U.S. economic recovery is prompting Paulson & Co. to change course. The $19 billion hedge fund firm, led by billionaire John Paulson, told investors on a conference call this month that the Paulson Recovery Fund will be renamed Paulson Special Situations Fund on Jan

  3. Europe - Hedge funds face exit tax as Iceland central bank discusses plan[more]

    From Bloomberg.com: Hedge funds and other creditors with claims against Iceland’s failed banks face an exit tax as the island looks for ways to unwind capital controls without hurting the economy. The government targets having a plan it can present by year-end that would map out how Iceland will sca

  4. Opalesque Exclusive: Risk management emerges as a competitive focus area for hedge funds[more]

    Bailey McCann, Opalesque New York: Risk management has always been a core component of any trading strategy, as well as a critical part of business management. However, as macreconomic weakness persists, and alpha becomes increasingly hard to generate, risk management as emerged as a more promin

  5. Gross: Inflation is required to pay for prior inflation[more]

    Benedicte Gravrand, Opalesque Geneva: As inflation rises, every dollar will buy a smaller percentage of a good. While deflation will mean a decrease in the general price level of goods and services. These two economic conditions are both in the waiting room. The consensus would like the former to