Sudden changes in political, economic and technological conditions can cause great uncertainty in all sections of society internationally. A recent example: the threat of massive tariff increases by US President Donald Trump caused great concern among numerous governments worldwide, accompanied by uncertainty among many companies, stock exchanges and financial markets as well as investors. A research unit recently approved by the German Research Foundation (DFG) is now analysing how exactly regulatory uncertainty affects the valuation of assets and investment decisions. Prof. Dr. Dr. h.c. Dr. h.c. Caren Sureth-Sloane from Paderborn University is working on two of the five sub-projects and is making a significant contribution to research into the consequences of regulatory uncertainty. She explains: "If the timing and scope of planned or probable regulatory measures, such as tax or customs changes or changes to climate policy, are not known or only known to a limited extent, considerable uncertainty arises. We are specifically interested in how regulatory uncertainty influences the valuation of assets and changes their attractiveness for investors." Around 3.2 million euros are available to the all-female team of seven researchers from six universities for four years.
Asset allocation problems: Effects on financial decisions
Asset allocation describes the strategic allocation of capital to different asset classes, such as equities, bonds or real estate, in order to optimise the mix of overall risk and return. One of the sub-projects deals with regulatory uncertainty in areas such as taxation and insurance, both fields that are subject to intense political debate, which in turn repeatedly leads to changes in regulation. Together with Prof. Dr. An Chen, spokesperson of the new research group and head of the Institute of Insurance Science at Ulm University, and Prof. Dr. Nicole B?uerle, vice-spokesperson of the research group and financial mathematician at the Karlsruhe Institute of Technology (KIT), Prof. Sureth-Sloane is investigating how regulatory uncertainty can act as a factor in mathematical models for asset allocation problems. Using specific applications from the fields of taxation and insurance, the researchers are theoretically demonstrating how regulatory uncertainty affects investors' financial decisions. This is because as soon as regulatory uncertainty comes into play, the mathematical models have to be adjusted.
The team looks at the consequences for investment decisions on the capital market when this uncertainty is taken into account. "To illustrate: an investor has divided her investments into 50 per cent equities, 40 per cent bonds and ten per cent as liquid assets. In order to only take on a level of risk that is acceptable to her, she follows a medium-risk strategy that also promises a moderate return. However, her investment strategy, which is mapped by a mathematical model, is thrown into disarray if the framework conditions suddenly change or threaten to change, e.g. through the discussion of tax or tariff increases for certain sectors or countries, and if the global stock exchanges and financial markets go crazy as a result. "We develop mathematical solution methods and numerical algorithms for optimal strategies under such conditions and also identify properties of instruments that the tax authorities, for example, could offer to protect taxpayers against certain types of tax uncertainty," explains Prof. Sureth-Sloane.
A new measure of tax expectations: econometric analysis
In a second sub-project, Prof. Sureth-Sloane and Prof. Dr. Monika Gehde-Trapp, Chair of Financial Institutions at the University of Tübingen, are investigating the effects of tax uncertainty and expectations about the future tax treatment of investments on the pricing of capital and other markets. The researchers are utilising price formation on markets through supply and demand. "We develop an innovative measure of investors' tax expectations and use it to analyse the consequences of investors' tax expectations and tax uncertainty. For example, tax uncertainty can affect not only the decisions of investors, but also the investment and distribution decisions in companies in which investors have invested. We will show how and to what extent investors' tax expectations and uncertainty affect companies and thus the economy," explains Prof. Sureth-Sloane.
Customised research into the influence of regulatory uncertainty
The research group is highly innovative in its investigations and works with scientific tools that are customised to the project - the result of close interdisciplinary collaboration between the team of economists and mathematicians, including experts in finance, insurance, tax. and econometrics. The research team is investigating the influence of regulatory uncertainty for three fields of application: firstly, for different sectors such as the highly regulated insurance industry; secondly, for the field of climate policy, which is characterised by regulatory measures such as the CO2 tax or emissions trading; and thirdly, for the tax system. In addition to Prof. Chen, Prof. B?uerle, Prof. Sureth-Sloane and Prof. Gehde-Trapp, the research group also includes Prof. Dr. Nicole Branger (University of Münster), Prof. Dr. Antje Mahayni (University of Duisburg-Essen) and Prof. Dr. Melanie Schienle (KIT).
This text was translated automatically.
