Notes On The Instrumental Variable Regression

1365 Words Sep 18th, 2014 6 Pages
Instrumental Variable Regression We acknowledge that endogeneity of trading frequency might be a problem since the price informativeness could have a systematic influence on the trading activity. A strategy to address the endogeneity problem is to employ an instrumental variable approach. We choose the official adjustment of stamp tax on security trading as one instrumental variable. On the one hand, stamp tax, as an exogenous policy instrument, is not related to the price informativeness. On the other hand, the change of stamp tax impacts the trading activity endogenously through the channel of trading cost, e.g. a rise of stamp tax is likely to motivate less frequent trading due to the rise of trading cost. There are four adjustments of stamp tax from 2005 to 2010, which are listed in Table 4.
Table 7 Change of stamp tax in China’s stock market
2005/1/23 From 0.2% to 0.1% on both sides
2007/5/30 From 0.1% to 0.3% on both sides
2008/4/24 From 0.3% to 0.1% on both sides
2008/9/19 Buyers are exempt from stamp tax, sellers are taxed at 0.1% The sample in the IV test is restricted to pre-adjustment 3 months and post-adjustment 3 months, i.e. eight quarters around the four stamp tax adjustment in total. So our sample in the IV test consists of 8,107 firm-quarter observations with 1,302 firms. We introduce a dummy variable Tax to proxy for the rise or decline of stamp tax. In the quarter before a stamp tax increase Tax=0, and in the quarter after a stamp tax increase Tax=1.…
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