Roland Mestel

Inducing Low-Carbon Investment in the Electric Power Industry Through a Price Floor for Emissions Trading

Uncertainty about long-term climate policy is a major driving force in the evolution of the carbon market price. Since this price enters the investment decision process of regulated firms, this uncertainty increases the cost of capital for investors and might deter investments into new technologies at the company level. We apply a real options-based approach to assess the impact of climate change policy in the form of a constant or growing price floor on investment decisions of a single firm in a competitive environment. This firm has the opportunity to switch from a high-carbon “dirty” technology to a low-carbon “clean” technology. Using Monte Carlo simulation and dynamic programming techniques for real data, we determine the optimal CO2 price floor level and growth rate in order to induce investments into the low-carbon technology. We find that a carbon price floor can be used to induce earlier low-carbon technology investment and show this result to be robust to a large variety of input parameter settings.

A Regime-Switching Relative Value Arbitrage Rule

The relative value arbitrage rule, also known as “pairs trading” or “statistical arbitrage”, is a well established speculative investment strategy on financial markets, dating back to the 1980s. Today, especially hedge funds and investment banks extensively implement pairs trading as a long/short investment strategy. Based on relative mispricing between a pair of stocks, pairs trading strategies create excess returns if the spread between two normally comoving stocks is away from its equilibrium path and is assumed to be mean reverting, i.e. deviations from the long term spread are only temporary effects. In this situation, pairs trading suggests to take a long position in the relative undervalued stock, while the relative overvalued stock should be shortened. The formation of the pairs ensues from a cointegration analysis of the historical prices. Consequently, pairs trading represents a form of statistical arbitrage where econometric time series models are applied to identify trading signals. However, fundamental economic reasons might cause simple pairs trading signals to be wrong. Think of a situation in which a profit warning of one of the two stocks entails the persistant widening of the spread, whereas for the other no new information is circulated. Under these circumstances, betting on the spread to revert to its historical mean would imply a loss.

The relationship between budgetary expenditure and economic growth in Poland

This paper investigates the association between different kinds of budgetary expenditure and economic growth of Poland. The empirical analysis makes use of linear and nonlinear Granger causality tests to evaluate the applicability of Wagner’s Law and that of the contrasting Keynesian theory. We employ aggregate and disaggregate data with the sub-categories of most important budgetary expenditure, including health care and social security, education and science, national defence and public security expenditure and government administration expenditure for the period Q1 2000 to Q3 2008. This causality analysis indicates that total relation between budgetary expenditure and economic growth is consistent with Keynesian theory. The results of our computations have important policy implications. In case of Poland the health care expenditure was found to be as important for economic growth as expenditures on education and science. Furthermore, in order to stimulate economic growth, Polish government should consider reallocating some of national defence, public security and government administration expenditure to health care, social security, education and science expenditure.

Insider behavior under different market structures: experimental evidence on trading patterns, manipulation, and profitability

We conduct laboratory experiments incorporating different market structures and insiders who compete with imperfectly informed traders. The insiders possess perfect information regarding the fundamental value of the tradable asset, whereas the imperfectly informed participants receive a noisy signal of fundamental value. In addition to the two trader types, we vary the market design by using either a stand-alone continuous double auction market or a continuous double auction market preceded by either a transparent or a nontransparent opening call auction. The results provide insights into whether and how insiders try to stay undetected, how their profits are accumulated and what market structures are advantageous for insiders.

On the Empirical Linkages between Stock Prices and Trading Activity on the German Stock Market

In this study the joint dynamics between stock prices and trading volume are investigated using data from the German stock market. Our results indicate no relations (contemporaneous as well as dynamic) between return levels and trading volume but strong linkages between return volatility and volume data. On including trading volume in the conditional volatility framework (GARCH-type) we provide empirical evidence for the importance of volume data as an indicator for the flow of information on the market. Applying Granger’s test for causality we detect also feedback relations between trading volume and return volatility. These findings corroborate our assumption that trading volume indirectly contains information about stock prices due to its relation to return volatility.

Capital Market Efficiency — An Empirical Analysis of the Dividend Announcement Effect for the Austrian Stock Market

This study investigates the effects of dividend announcements using data from the Austrian stock market. Abnormal returns are established as the difference between actual returns and predicted returns generated from time series models. We use the model of expected dividends, where expectations are based on prior dividends. Our results provide evidence that announced dividend changes convey new information to the market as stock prices move in the same direction as dividends. In addition, the speed of stock price reaction to the new information provides a test of the semistrong form of the efficient capital market hypothesis.

A Good Beginning Makes a Good Market: The Effect of Different Market Opening Structures on Market Quality

This paper deals with the market structure at the opening of the trading day and its influence on subsequent trading. We compare a single continuous double auction and two complement markets with different call auction designs as opening mechanisms in a unified experimental framework. The call auctions differ with respect to their levels of transparency. We find that a call auction not only improves market efficiency and liquidity at the beginning of the trading day when compared to the stand-alone continuous double auction, but also causes positive spillover effects on subsequent trading. Concerning the design of the opening call auction, we find no significant differences between the transparent and nontransparent specification with respect to opening prices and liquidity. In the course of subsequent continuous trading, however, market quality is slightly higher after a nontransparent call auction.

The Effect of Different Market Opening Structures on Market Quality - Experimental Evidence

This experimental study focuses on the effect of opening call auctions on market quality. Our examination extends the existing market microstructure literature in two respects. First, in addition of analyzing the market opening, we examine the effect of an opening call auction on the subsequent continuous trading phase. Second, we analyze two different kinds of call auctions with different pre-opening transparency levels. We find that an opening call auction significantly increases the informational efficiency of opening prices and leads to higher market quality of the subsequent continuous double auction market as compared to the continuous double auction alone.

An experiment examining insider trading with respect to different market structures

As theoretical and empirical approaches suffer some shortcomings if it comes to analyzing insiders’ behavior, we conducted an adequate experiment. The experimental design incorporates traders with perfect information of the fundamental value of the tradeable asset. These insiders compete with regular uninformed participants on different market structures, in particular on a transparent and on an intransparent call market as well as on a continuous double auction. The results shed first light on a couple of interesting issues, including whether and how insiders try to stay undetected, how their profits are accumulated and what market structure is more advantageous for insiders.