Project 5: Derivatives-implied tax uncertainty
Work Package 1:
WP1 develops no-arbitrage models for portfolios that have identical pre-tax but different post-tax cash flows, enabling us to extract implied tax expectations. Two sets of strategies are constructed: (1) using dividend futures and corresponding stock–option portfolios, and (2) using gold-based ETPs with and without tax exemptions. The price differences between these portfolios reveal expected future tax rates on dividends and capital gains. We calibrate the model using Eurex dividend futures (EURO STOXX 50 and single-stock contracts) and Xetra Gold and EUWAX Gold 2 data. The resulting time series of implied tax expectations are validated through VAR and cointegration analyses linking them to tax-related discussions, reforms, and court rulings.
Deriving and estimating implied tax expectations
Work Package 2:
WP2 quantifies tax uncertainty based on fluctuations in the implied tax expectations estimated in WP1. We compute rolling-window standard deviations and estimate ARCH/GARCH and GARCH-MIDAS models to capture dynamic tax uncertainty. These measures are validated against established indices such as Baker, Bloom, and Davis’s Economic Policy Uncertainty Index and major tax-related policy events. We also explore higher-order moments to understand whether variance alone captures the full effect of uncertainty. Additionally, the project connects to the DFG Research Unit FOR 2738 to relate investor-level implied expectations to forward-looking corporate tax measures, analyzing commonalities between firm-level and investor-level tax uncertainty.
Investment effects of tax uncertainty
Work Package 3:
Measuring tax uncertainty
WP3 investigates how tax expectations and tax uncertainty affect asset returns and corporate behavior. Using European stock data, we estimate the sensitivity of returns to implied tax expectations and uncertainty in Fama–MacBeth regressions. We test whether assets with higher sensitivity to tax risk command higher expected returns and whether tax uncertainty is priced in equilibrium. On the corporate side, we study whether changes in expected tax penalties influence firms’ payout and investment policies, using data from France and Germany. The analysis connects to the Collaborative Research Center TRR 266 “Accounting for Transparency”, leveraging institutional expertise to assess how tax regulation and uncertainty translate into real investment responses.
This project investigates how tax expectations and tax uncertainty affect asset prices and corporate decision-making. We develop market-based, forward-looking measures of tax expectations and tax uncertainty using derivative prices such as dividend futures and exchange-traded products (ETP). These instruments generate equivalent pre-tax but differing post-tax cash flows, allowing us to infer derivatives-implied tax expectations for both institutional and retail investors.
The project proceeds in three steps. First, we derive and estimate investors’ implied tax expectations from observed price differences between derivative-based and spot portfolios. Second, we quantify tax uncertainty as the variation in implied expectations and validate it against tax-related news and policy events. Third, we test how tax expectations and uncertainty influence asset pricing, corporate payout, and investment policy.
Our work introduces a novel, forward-looking measure of investor-level tax expectations and contributes to the literature on taxation, uncertainty, and financial markets. It links tax policy uncertainty to asset pricing and corporate finance, offering new insights for investors, firms, and policymakers. The research objectives lead to the following Work Packages:
