Fiscal Policy in Europe: How Effective Are Automatic Stabilisers?

It is largely recognised that fiscal policy will have largerresponsibilities for cyclicalstabilisation in EMU given the loss of the monetary instrument.At the same time, theEMU's budgetary framework emphasises the need to rely onautomatic fiscal stabilisers,rather than active policies in cushioning the business cycle.We show that automaticstabilisers are relatively powerful in the event of shocksto private consumption, but lessso in the case of shocks to private investment and exports.In the case of supply sideshocks, the automatic stabilisers are largely ineffective,but this may actually be a goodthing to the extent that supply-side disturbances call forstructural adjustment rather thancyclical stabilisation.     

The pragmatic dimension

Arguments are delivered against the proposition that choosing a qualitative or a quantitative research method is completely paradigmatically determined and that these methods cannot be justifiably triangulated or combined because of the incompatibility of their associated paradigms.Social scientific paradigms (such as the empirical-analytical, interpretative and critical paradigms) do not appear logically compelling incompatible with respect to ontological or epistemological aspects as is often stated. In addition, paradigms and methods are mutually underdetermined. This is so. because the linkages of paradigms with methods are partly based on a kind of Wahlverwandtschaft and because these linkages seem partly to be of a psychological and sociological nature.     

What Drives Executive Stock Option Backdating?

We study motives for executive stock option backdating, the practice of changing the grant dates of current options to dates in the past using hindsight. We find that smaller, younger and less profitable firms tend to be more heavily involved in backdating. These results are consistent with the retention hypothesis. In line with the incentive hypothesis, we find that backdating occurs more for options that are out‐of‐the‐money. We derive some evidence for the agency hypothesis, in the sense that backdating companies have a larger percentage of inside directors. However, contrary to this hypothesis, we conclude that backdating firms have better protection for minority shareholders compared to firms that do not backdate.     

Co-optimization of enhanced oil recovery and carbon sequestration

In this paper, we present an economic analysis of CO₂-enhanced oil recovery (EOR). This technique entails injection of CO₂ into mature oil fields in a manner that reduces the oil's viscosity, thereby enhancing the rate of extraction. As part of this process, significant quantities of CO₂ remain sequestered in the reservoir. If CO₂ emissions are regulated, oil producers using EOR should therefore be able to earn revenues from sequestration as well as from oil production. We develop a theoretical framework that analyzes the dynamic co-optimization of oil extraction and CO₂ sequestration, through the producer's choice of the fraction of CO₂ in the injection stream at each moment. We find that the optimal fraction of CO₂ is likely to decline monotonically over time, and reach zero before the optimal termination time. Numerical simulations, based on an ongoing EOR project in Wyoming, confirm this result. We also find that cumulative sequestration is less responsive to the carbon tax than to the oil price. Only at very high taxes does a tradeoff between revenues from oil output and sequestration arise.     

Reverse convertible bonds analyzed

We study the pricing of reverse convertible (RC) bonds. These are bonds that carry high coupon payments. In exchange, the issuer has an option at the maturity date to either redeem the bonds in cash or to deliver a pre‐specified number of shares. We find that Dutch plain vanilla and knock‐in RC bonds are, on average, overpriced by almost 6%. This overpricing is confirmed in a model‐free analysis with respect to option‐ and bond‐pricing models. We find that rational factors explain 23% of the documented overpricing. In addition, we find that the combination of financial marketing, framing, and the representativeness bias further increases our ability to explain the documented overpricing to more than 35%. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:895–919, 2009     

An Empirical Analysis of the Pricing of Bank Issued Options versus Options Exchange Options

Since 1998, large investment banks have become active as issuers of options, generally referred to as call warrants or bank‐issued options. This has led to an interesting situation in the Netherlands, where simultaneously call warrants are traded on the stock exchange, and long‐term call options are traded on the options exchange. Both entitle their holders to buy shares of common stock. We start with a direct comparison between call warrants and call options, written on the same stock and with the same exercise price, but where the call option has a longer time to maturity. In 13 out of 16 cases we find that the call warrants are priced higher, which is a clear violation of basic option pricing rules. In the second part of the analysis we use option pricing models to compare the pricing of call warrants and call options. If implied standard deviations from options are used to price the call warrants, we find that the call warrants are strongly overpriced during the first five trading days. The average overpricing is between 25 and 30%. Only a small part of the overpricing can be explained by rational arguments such as transaction costs. We suggest that the overvaluation can be explained by a combination of an active financial marketing by the banks and the framing effect.     

Institutional investors' holdings surrounding equity rights offerings

We examine shareholding surrounding Swedish rights offerings using detailed information on the ownership in firms. We analyze shareholding levels and their changes for domestic and foreign institutional investors. As institutional holdings change, domestic institutions increase their holdings more than foreign institutions. Our examination of low and high buying activities by institutional investors surrounding rights offerings shows no stock picking ability, thus not supporting the “smart-money hypothesis” (Gibson et al., 2004). We also find that investor domicile influences firm value following the offering. Overall, foreign investors exhibit a strong and opposite directional reaction to adverse selection costs than domestic investors.     

Managerial actions and nominal stock price levels

We examine nominal and real stock prices and the sequential price pattern of stock dividends and stock splits. We find that the average stock price has been fairly stable over time except for two decades in the beginning and end of the twentieth century. Inclusion of these periods yield a decline over time which is generally consistent with the drop in price levels found by Chittenden et al. [2010. “A Note on Affordability and the Optimal Share Price.” Financial Review 45: 205–216]. In a multivariate setting, the frequency of stock dividends and stock splits is positively related to the frequency for these events the prior year and recent market return. In further tests of the price change we find a positive relationship to the median price change for stock dividends/splits and negatively to labour income growth for stock splits. These findings indicate that stock price reduction via stock dividends and splits attracts individual investors as income grows. One key conclusion is that the primary reason for any stock action, dividend or split, is to fit the ‘norm’ stock price level of the market.     

Fiscal consolidation in Germany

The German federal government’s fiscal consolidation package, announced in June, is designed to permanently reduce the federal deficit to a new target level. This article uses a three-region version of the European Commission’s QUEST model to gauge the impact of the package on Germany and the spillover to the rest of the euro area and the rest of the world.