Academic

Bai & Meng on Transactions Costs as a Regulatory Tool

By Lawrence Solum

Lynn Bai and Rujing Meng (University of Cincinnati - College of Law and University of Hong Kong - Faculty of Business and Economics) has posted Deterring 'Double-Play' Manipulation in Financial Crisis: Increasing Transaction Cost as a Regulatory Tool on SSRN. Here is the abstract:

The subprime mortgage crisis that originated in the United States has triggered a global credit crunch, threatening the solvency of emerging markets that have relied heavily on foreign debt, and resulting in the devaluation of their currencies. Currency market interventions by the central banks in countries with a currency board system led to higher short-term interest rates and further declinations in the local stock market. This economic setting invites the double-play manipulation strategy that simultaneously attacks both the local currency and the stock market. History has shown that a central bank?s stock market intervention is costly and that sustaining the intervention over a meaningful period of time is a major challenge. In this paper, we examine the effect of a pan-market increase in transaction cost on double-play manipulators? trading strategies when government intervention is limited to revenues generated by the transaction levy. We show that this regulatory change not only helps sustain equity market intervention but also reduces the short pressure in both the currency and the equity market.

Full post as published by Legal Theory Blog on April 15, 2009 (boomark / email).