The Impact Of The Adjustment Of Stock Transaction Tax On The Liquidity Of Chinese Stock Market

Market liquidity, considered as the one of the feature of the financial market, is extremely significant to the infrastructure and interior mechanism of the stock market.Since the frequency of the adjustment of the rate of the stock transaction tax increase, also called stamp tax, it has recently caused the controversy over the effectiveness of the adjustment policy and the current rate of stock transaction tax. The major discrepancy lies in the: whether adjustment of the rate of the stock transaction tax can be an effective tool of the government policy and regulation without undermining the infrastructure and interior mechanism of the stock market. Generally speaking the advocates justify the existence of the stock transaction tax increase on the basis that the stock transaction tax is supposed to curb the speculative trading behavior match with the intention of the government intervention and prevent the bubble of the asset price expanding, whereas the opposers believe the frequent adjustment of the tax rate should have disabled the market inferior variables to allocate the capital, increase the transaction cost, spoil the pricing mechanism of the market and finally lower the liquidity of the market.To what extent the market liquidity can be affect by the adjustment of the stock transaction tax? Dose the government guarantee the impact consistent with the purpose of the policy?This paper chooses four cases of adjustment of the stock transaction tax of Chinese stock market which ever happened from Jan.2005 to Jan.2005 as the subject of the empirical research. It aims to build integrated index and models which is suitable for accurately measuring the liquidity of the Chinese stock market. Then based on the daily or 5-minite transaction data sourcing from the Shanghai stock exchange, the values of the liquidity indexes are put into a series of the statistical test, aiming to test the impact of the adjustment of the stock transaction tax over the market liquidity. The next step is building the linear regression model to test whether the adjustment of the stock transaction tax is mainly responsible for the change of the value of the liquidity index after the case happen, by adding the controllable variable such as market price, volume and the interest rate.The result of the paired test and regression analysis shows the higher level of the rate of stock transaction tax will undermine the condition of market liquidity and lower level of that will improve it. It is also can be found that the impact of regulating the market by the adjustment of the stamp tax rate is featured by "time lag" and can only be found obviously in the short term. So the government policy in terms of the adjustment of the stamp tax rate is not much significant for the long tern target of build a good investment environment.At the end of this paper, we put forward our recommendations about improvement on the tax regulation with relevant to the Chinese stock market and the choices of implementing government policy when regulating the stock market according to the characteristics of the relevant tax law and the effectiveness of the government policy.