Heterogeneous beliefs and short selling taxes: a note
Heterogeneous beliefs and short selling taxes: a note
Short selling is widespread in financial markets but regulators can ban short positions. The intermediate policy of taxing short sellers has been studied in an asset pricing model with evolutionary competition of two belief types (Anufriev and Tuinstra, 2013). We extend this approach to an arbitrary number of belief types H, giving 3^h - 2^H cases to check each period in the worst-case scenario. We provide analytic expressions for asset prices along with conditions on beliefs (optimism) that determine which types take long, short or zero asset positions at the market-clearing price. We use these results to construct a fast solution algorithm (quadratic in H) which can solve models with hundreds or thousands of types in a matter of seconds. A numerical example with a short-selling tax and many heterogeneous beliefs in evolutionary competition shows that price dynamics can differ substantially relative to the benchmark of few types.
Hatcher, Michael
e0846252-6d46-44f8-ba3c-05cf1fba64ab
15 October 2024
Hatcher, Michael
e0846252-6d46-44f8-ba3c-05cf1fba64ab
Hatcher, Michael
(2024)
Heterogeneous beliefs and short selling taxes: a note.
Journal of Economic Dynamics and Control, 168, [104970].
(doi:10.1016/j.jedc.2024.104970).
Abstract
Short selling is widespread in financial markets but regulators can ban short positions. The intermediate policy of taxing short sellers has been studied in an asset pricing model with evolutionary competition of two belief types (Anufriev and Tuinstra, 2013). We extend this approach to an arbitrary number of belief types H, giving 3^h - 2^H cases to check each period in the worst-case scenario. We provide analytic expressions for asset prices along with conditions on beliefs (optimism) that determine which types take long, short or zero asset positions at the market-clearing price. We use these results to construct a fast solution algorithm (quadratic in H) which can solve models with hundreds or thousands of types in a matter of seconds. A numerical example with a short-selling tax and many heterogeneous beliefs in evolutionary competition shows that price dynamics can differ substantially relative to the benchmark of few types.
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Hatcher_Short_Selling_Tax_2024
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Accepted/In Press date: 6 October 2024
e-pub ahead of print date: 10 October 2024
Published date: 15 October 2024
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Local EPrints ID: 495632
URI: http://eprints.soton.ac.uk/id/eprint/495632
ISSN: 0165-1889
PURE UUID: 919b8c0b-feed-43de-88be-e935af150a03
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Date deposited: 19 Nov 2024 17:51
Last modified: 20 Nov 2024 02:46
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