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Designing Optimal Fiscal Intervention in the CAC 40: A Fractional Memory Approach to Tax-Rate Volatility

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  • boughabi, houssam

Abstract

This paper investigates whether long-memory fiscal policy, implemented through tax-rate volatility, can contribute to preserving stock market efficiency. Focusing on the CAC 40 index during its historically efficient period (1999–2000), we incorporate a fractional Brownian motion structure into a Heston–Nandi volatility framework to model the dynamics of fiscal variance. Tax-rate volatility is interpreted as a dynamic policy instrument operating under martingale pricing conditions and reflecting market expectations. We formulate and solve a nonlinear optimization problem subject to moment and smoothness constraints to identify optimal fiscal variance trajectories. The model is empirically calibrated using a fiscal–market variance proxy derived from observed CAC 40 dynamics. The results indicate that when the tax-variance process exhibits strong persistence, characterized by a Hurst exponent close to 0.9, the model closely reproduces the observed relationship ( \mathrm{Var}(\tau_{t+1}) = \lambda^{2}\mathrm{Var}(h_{t+1}) + 1 ). These findings suggest that persistent and well-structured fiscal volatility may reinforce, rather than undermine, informational efficiency in equity markets.

Suggested Citation

  • boughabi, houssam, 2025. "Designing Optimal Fiscal Intervention in the CAC 40: A Fractional Memory Approach to Tax-Rate Volatility," MPRA Paper 129470, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:129470
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    References listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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