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:
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