The Impact of the Public Fund Securities Transaction Tax Exemption on Arbitrage Trading

Abstract

This study empirically analyzes the effects of price discovery and linkages between the spot and futures markets since the securities transaction tax was exempted from the arbitrage of the Korea Post in April 2017. The main results are as follows. First, in the period when the securities transaction tax was exempted, information transmission between the exchange traded fund (ETF), spot, and futures markets were significantly activated compared to the taxation period. Second, the change in disparity between the ETF, spot, and futures markets decreased significantly after the securities transaction tax was exempted, and information transmission also changed structurally. During the tax exemption period, arbitrage trading tended to follow the disparity between the ETF and spot markets, which is similar to the arbitrage behavior that follows the disparity between the spot and futures market. Third, in the aforementioned period, institutional investors significantly reduced the disparity through arbitrage trading. By contrast, during the period when the securities transaction tax on Korea Post was imposed, the impact of foreigners who reduced the disparity through arbitrage trading disappeared during the tax exemption period. This provides direct evidence that tax-exempted investors improve the quality of the markets associated with arbitrage. The empirical results suggest that the tax policy for Korea Post, which was extended until 2021 in accordance with the amendment of the Tax Exemption Act, had a positive effect on the activation of the arbitrage market. Key words: Exchange Traded Funds(ETF); Arbitrage Transaction; Disparity; Price Discovery; Securities Transaction Tax JEL Classification: G11, G12