Working paper No. 71
By Victoria Saporta and Kamhon Kan
This paper investigates the effects of stamp duty - the UK securities transaction tax - on the level and volatility of equity prices. We examine the response of the equity market to announcements of changes in stamp duty rates and we compare the prices of two assets which are similar in all respects apart from their treatment for stamp duty purposes: American Depositary Receipts (ADRs) and their London Stock Exchange-traded stocks. Our findings are consistent with the hypothesis that stamp duty is capitalised in prices. Using univariate GARCH models, we find that stamp duty has no effect on volatility, contradicting the key hypothesis put forward by proponents of transaction taxes.