Three essays in financial economics: asset pricing, optimal portfolio selection and financial integration

Executive Summary The unifying theme of this thesis is the pursuit of a satisfactory ways to quantify the riskureward trade-off in financial economics. First in the context of a general asset pricing model, then across models and finally across country borders. The guiding principle in that pursuit was to seek innovative solutions by combining ideas from different fields in economics and broad scientific research. For example, in the first part of this thesis we sought a fruitful application of strong existence results in utility theory to topics in asset pricing. In the second part we implement an idea from the field of fuzzy set theory to the optimal portfolio selection problem, while the third part of this thesis is to the best of our knowledge, the first empirical application of some general results in asset pricing in incomplete markets to the important topic of measurement of financial integration. While the first two parts of this thesis effectively combine well-known ways to quantify the risk-reward trade-offs the third one can be viewed as an empirical verification of the usefulness of the so-called "good deal bounds" theory in designing risk-sensitive pricing bounds. Chapter 1 develops a discrete-time asset pricing model, based on a novel ordinally equivalent representation of recursive utility. To the best of our knowledge, we are the first to use a member of a novel class of recursive utility generators to construct a representative agent model to address some long-lasting issues in asset pricing. Applying strong representation results allows us to show that the model features countercyclical risk premia, for both consumption and financial risk, together with low and procyclical risk free rate. As the recursive utility used nests as a special case the well-known time-state separable utility, all results nest the corresponding ones from the standard model and thus shed light on its well-known shortcomings. The empirical investigation to support these theoretical results, however, showed that as long as one resorts to econometric methods based on approximating conditional moments with unconditional ones, it is not possible to distinguish the model we propose from the standard one. Chapter 2 is a join work with Sergei Sontchik. There we provide theoretical and empirical motivation for aggregation of performance measures. The main idea is that as it makes sense to apply several performance measures ex-post, it also makes sense to base optimal portfolio selection on ex-ante maximization of as many possible performance measures as desired. We thus offer a concrete algorithm for optimal portfolio selection via ex-ante optimization over different horizons of several risk-return trade-offs simultaneously. An empirical application of that algorithm, using seven popular performance measures, suggests that realized returns feature better distributional characteristics relative to those of realized returns from portfolio strategies optimal with respect to single performance measures. When comparing the distributions of realized returns we used two partial risk-reward orderings first and second order stochastic dominance. We first used the Kolmogorov Smirnov test to determine if the two distributions are indeed different, which combined with a visual inspection allowed us to demonstrate that the way we propose to aggregate performance measures leads to portfolio realized returns that first order stochastically dominate the ones that result from optimization only with respect to, for example, Treynor ratio and Jensen's alpha. We checked for second order stochastic dominance via point wise comparison of the so-called absolute Lorenz curve, or the sequence of expected shortfalls for a range of quantiles. As soon as the plot of the absolute Lorenz curve for the aggregated performance measures was above the one corresponding to each individual measure, we were tempted to conclude that the algorithm we propose leads to portfolio returns distribution that second order stochastically dominates virtually all performance measures considered. Chapter 3 proposes a measure of financial integration, based on recent advances in asset pricing in incomplete markets. Given a base market (a set of traded assets) and an index of another market, we propose to measure financial integration through time by the size of the spread between the pricing bounds of the market index, relative to the base market. The bigger the spread around country index A, viewed from market B, the less integrated markets A and B are. We investigate the presence of structural breaks in the size of the spread for EMU member country indices before and after the introduction of the Euro. We find evidence that both the level and the volatility of our financial integration measure increased after the introduction of the Euro. That counterintuitive result suggests the presence of an inherent weakness in the attempt to measure financial integration independently of economic fundamentals. Nevertheless, the results about the bounds on the risk free rate appear plausible from the view point of existing economic theory about the impact of integration on interest rates.

Selection of patients with germline MLH1 mutated Lynch syndrome by determination of MLH1 methylation and BRAF mutation.

Lynch syndrome is one of the most common hereditary colorectal cancer (CRC) syndrome and is caused by germline mutations of MLH1, MSH2 and more rarely MSH6, PMS2, MLH3 genes. Whereas the absence of MSH2 protein is predictive of Lynch syndrome, it is not the case for the absence of MLH1 protein. The purpose of this study was to develop a sensitive and cost effective algorithm to select Lynch syndrome cases among patients with MLH1 immunohistochemical silencing. Eleven sporadic CRC and 16 Lynch syndrome cases with MLH1 protein abnormalities were selected. The BRAF c.1799T> A mutation (p.Val600Glu) was analyzed by direct sequencing after PCR amplification of exon 15. Methylation of MLH1 promoter was determined by Methylation-Sensitive Single-Strand Conformation Analysis. In patients with Lynch syndrome, there was no BRAF mutation and only one case showed MLH1 methylation (6%). In sporadic CRC, all cases were MLH1 methylated (100%) and 8 out of 11 cases carried the above BRAF mutation (73%) whereas only 3 cases were BRAF wild type (27%). We propose the following algorithm: (1) no further molecular analysis should be performed for CRC exhibiting MLH1 methylation and BRAF mutation, and these cases should be considered as sporadic CRC; (2) CRC with unmethylated MLH1 and negative for BRAF mutation should be considered as Lynch syndrome; and (3) only a small fraction of CRC with MLH1 promoter methylation but negative for BRAF mutation should be true Lynch syndrome patients. These potentially Lynch syndrome patients should be offered genetic counselling before searching for MLH1 gene mutations.

Retroviral Integration Site Selection

The stable insertion of a copy of their genome into the host cell genome is an essential step of the life cycle of retroviruses. The site of viral DNA integration, mediated by the viral-encoded integrase enzyme, has important consequences for both the virus and the host cell. The analysis of retroviral integration site distribution was facilitated by the availability of the human genome sequence, revealing the non-random feature of integration site selection and identifying different favored and disfavored genomic locations for individual retroviruses. This review will summarize the current knowledge about retroviral differences in their integration site preferences as well as the mechanisms involved in this process.

The stationary distribution of a continuously varying strategy in a class-structured population under mutation-selection-drift balance.

Many traits and/or strategies expressed by organisms are quantitative phenotypes. Because populations are of finite size and genomes are subject to mutations, these continuously varying phenotypes are under the joint pressure of mutation, natural selection and random genetic drift. This article derives the stationary distribution for such a phenotype under a mutation-selection-drift balance in a class-structured population allowing for demographically varying class sizes and/or changing environmental conditions. The salient feature of the stationary distribution is that it can be entirely characterized in terms of the average size of the gene pool and Hamilton's inclusive fitness effect. The exploration of the phenotypic space varies exponentially with the cumulative inclusive fitness effect over state space, which determines an adaptive landscape. The peaks of the landscapes are those phenotypes that are candidate evolutionary stable strategies and can be determined by standard phenotypic selection gradient methods (e.g. evolutionary game theory, kin selection theory, adaptive dynamics). The curvature of the stationary distribution provides a measure of the stability by convergence of candidate evolutionary stable strategies, and it is evaluated explicitly for two biological scenarios: first, a coordination game, which illustrates that, for a multipeaked adaptive landscape, stochastically stable strategies can be singled out by letting the size of the gene pool grow large; second, a sex-allocation game for diploids and haplo-diploids, which suggests that the equilibrium sex ratio follows a Beta distribution with parameters depending on the features of the genetic system.

Fuzzy logic algorithm to extract specific interaction forces from atomic force microscopy data

The atomic force microscope is not only a very convenient tool for studying the topography of different samples, but it can also be used to measure specific binding forces between molecules. For this purpose, one type of molecule is attached to the tip and the other one to the substrate. Approaching the tip to the substrate allows the molecules to bind together. Retracting the tip breaks the newly formed bond. The rupture of a specific bond appears in the force-distance curves as a spike from which the binding force can be deduced. In this article we present an algorithm to automatically process force-distance curves in order to obtain bond strength histograms. The algorithm is based on a fuzzy logic approach that permits an evaluation of "quality" for every event and makes the detection procedure much faster compared to a manual selection. In this article, the software has been applied to measure the binding strength between tubuline and microtubuline associated proteins.

Is tumour size an underestimated feature in the current TNM system for malignancies of the pancreatic head?

BACKGROUND: As the long-term survival of pancreatic head malignancies remains dismal, efforts have been made for a better patient selection and a tailored treatment. Tumour size could also be used for patient stratification. METHODS: One hundred and fourteen patients underwent a pancreaticoduodenectomy for pancreatic adenocarcinoma, peri-ampullary and biliary cancer stratified according to: ≤20 mm, 21-34 mm, 35-45 mm and >45 mm tumour size. RESULTS: Patients with tumour sizes of ≤20 mm had a N1 rate of 41% and a R1/2 rate of 7%. The median survival was 3.4 years. N1 and R1/2 rates increased to 84% and 31% for tumour sizes of 21-34 mm (P = 0.0002 for N, P = 0.02 for R). The median survival decreased to 1.6 years (P = 0.0003). A further increase in tumour size of 35-45 mm revealed a further increase of N1 and R1/2 rates of 93% (P < 0.0001) and 33%, respectively. The median survival was 1.2 years (P = 0.004). Tumour sizes >45 mm were related to a further decreased median survival of 1.1 years (P = 0.2), whereas N1 and R1/2 rates were 87% and 20%, respectively. DISCUSSION: Tumour size is an important feature of pancreatic head malignancies. A tumour diameter of 20 mm seems to be the cut-off above which an increased rate of incomplete resections and metastatic lymph nodes must be encountered and the median survival is reduced.

Effects of selection and drift on G matrix evolution in a heterogeneous environment: a multivariate Qst-Fst Test with the freshwater snail Galba truncatula.

Unraveling the effect of selection vs. drift on the evolution of quantitative traits is commonly achieved by one of two methods. Either one contrasts population differentiation estimates for genetic markers and quantitative traits (the Q(st)-F(st) contrast) or multivariate methods are used to study the covariance between sets of traits. In particular, many studies have focused on the genetic variance-covariance matrix (the G matrix). However, both drift and selection can cause changes in G. To understand their joint effects, we recently combined the two methods into a single test (accompanying article by Martin et al.), which we apply here to a network of 16 natural populations of the freshwater snail Galba truncatula. Using this new neutrality test, extended to hierarchical population structures, we studied the multivariate equivalent of the Q(st)-F(st) contrast for several life-history traits of G. truncatula. We found strong evidence of selection acting on multivariate phenotypes. Selection was homogeneous among populations within each habitat and heterogeneous between habitats. We found that the G matrices were relatively stable within each habitat, with proportionality between the among-populations (D) and the within-populations (G) covariance matrices. The effect of habitat heterogeneity is to break this proportionality because of selection for habitat-dependent optima. Individual-based simulations mimicking our empirical system confirmed that these patterns are expected under the selective regime inferred. We show that homogenizing selection can mimic some effect of drift on the G matrix (G and D almost proportional), but that incorporating information from molecular markers (multivariate Q(st)-F(st)) allows disentangling the two effects.

Wound infection after excision and primary midline closure for pilonidal disease: risk factor analysis to improve patient selection.

BACKGROUND: Excision and primary midline closure for pilonidal disease (PD) is a simple procedure; however, it is frequently complicated by infection and prolonged healing. The aim of this study was to analyze risk factors for surgical site infection (SSI) in this context. METHODS: All consecutive patients undergoing excision and primary closure for PD from January 2002 through October 2008 were retrospectively assessed. The end points were SSI, as defined by the Center for Disease Control, and time to healing. Univariable and multivariable risk factor analyses were performed. RESULTS: One hundred thirty-one patients were included [97 men (74%), median age = 24 (range 15-66) years]. SSI occurred in 41 (31%) patients. Median time to healing was 20 days (range 12-76) in patients without SSI and 62 days (range 20-176) in patients with SSI (P < 0.0001). In univariable and multivariable analyses, smoking [OR = 2.6 (95% CI 1.02, 6.8), P = 0.046] and lack of antibiotic prophylaxis [OR = 5.6 (95% CI 2.5, 14.3), P = 0.001] were significant predictors for SSI. Adjusted for SSI, age over 25 was a significant predictor of prolonged healing. CONCLUSION: This study suggests that the rate of SSI after excision and primary closure of PD is higher in smokers and could be reduced by antibiotic prophylaxis. SSI significantly prolongs healing time, particularly in patients over 25 years.

Pervasive positive selection on duplicated and nonduplicated vertebrate protein coding genes.

A stringent branch-site codon model was used to detect positive selection in vertebrate evolution. We show that the test is robust to the large evolutionary distances involved. Positive selection was detected in 77% of 884 genes studied. Most positive selection concerns a few sites on a single branch of the phylogenetic tree: Between 0.9% and 4.7% of sites are affected by positive selection depending on the branches. No functional category was overrepresented among genes under positive selection. Surprisingly, whole genome duplication had no effect on the prevalence of positive selection, whether the fish-specific genome duplication or the two rounds at the origin of vertebrates. Thus positive selection has not been limited to a few gene classes, or to specific evolutionary events such as duplication, but has been pervasive during vertebrate evolution.

Structured RNAs in the ENCODE selected regions of the human genome.

Functional RNA structures play an important role both in the context of noncoding RNA transcripts as well as regulatory elements in mRNAs. Here we present a computational study to detect functional RNA structures within the ENCODE regions of the human genome. Since structural RNAs in general lack characteristic signals in primary sequence, comparative approaches evaluating evolutionary conservation of structures are most promising. We have used three recently introduced programs based on either phylogenetic-stochastic context-free grammar (EvoFold) or energy directed folding (RNAz and AlifoldZ), yielding several thousand candidate structures (corresponding to approximately 2.7% of the ENCODE regions). EvoFold has its highest sensitivity in highly conserved and relatively AU-rich regions, while RNAz favors slightly GC-rich regions, resulting in a relatively small overlap between methods. Comparison with the GENCODE annotation points to functional RNAs in all genomic contexts, with a slightly increased density in 3'-UTRs. While we estimate a significant false discovery rate of approximately 50%-70% many of the predictions can be further substantiated by additional criteria: 248 loci are predicted by both RNAz and EvoFold, and an additional 239 RNAz or EvoFold predictions are supported by the (more stringent) AlifoldZ algorithm. Five hundred seventy RNAz structure predictions fall into regions that show signs of selection pressure also on the sequence level (i.e., conserved elements). More than 700 predictions overlap with noncoding transcripts detected by oligonucleotide tiling arrays. One hundred seventy-five selected candidates were tested by RT-PCR in six tissues, and expression could be verified in 43 cases (24.6%).

An objective anisotropic elastic plastic model and Algorithm applicable to bone mechanics

The implicit projection algorithm of isotropic plasticity is extended to an objective anisotropic elastic perfectly plastic model. The recursion formula developed to project the trial stress on the yield surface, is applicable to any non linear elastic law and any plastic yield function.A curvilinear transverse isotropic model based on a quadratic elastic potential and on Hill's quadratic yield criterion is then developed and implemented in a computer program for bone mechanics perspectives. The paper concludes with a numerical study of a schematic bone-prosthesis system to illustrate the potential of the model.

Aging and motor programming: differential effects according to the selection of action

There are controversial reports about the effect of aging on movement preparation, and it is unclear to which extent cognitive and/or motor related cerebral processes may be affected. This study examines the age effects on electro-cortical oscillatory patterns during various motor programming tasks, in order to assess potential differences according to the mode of action selection. Twenty elderly (EP, 60-84 years) and 20 young (YP, 20-29 years) participants with normal cognition underwent 3 pre-cued response tasks (S1-S2 paradigm). S1 carried either complete information on response side (Full; stimulus-driven motor preparation), no information (None; general motor alertness), or required free response side selection (Free; internally-driven motor preparation). Electroencephalogram (EEG) was recorded using 64 surface electrodes. Alpha (8-12 Hz) desynchronization (ERD)/synchronization (ERS) and motor-related amplitude asymmetries (MRAA) were analyzed during the S1-S2 interval. Reaction times (RTs) to S2 were slower in EP than YP, and in None than in the other 2 tasks. There was an Age x Task interaction due to increased RTs in Free compared to Full in EP only. Central bilateral and midline activation (alpha ERD) was smaller in EP than YP in None. In Full just before S2, readiness to move was reflected by posterior midline inhibition (alpha ERS) in both groups. In Free, such inhibition was present only in YP. Moreover, MRAA showed motor activity lateralization in both groups in Full, but only in YP in Free. The results indicate reduced recruitment of motor regions for motor alertness in the elderly. They further show less efficient cerebral processes subtending free selection of movement in elders, suggesting reduced capacity for internally-driven action with age.

Inconsistency between different measures of sexual selection.

Measuring the intensity of sexual selection is of fundamental importance to the study of sexual dimorphism, population dynamics, and speciation. Several indices, pools of individuals, and fitness proxies are used in the literature, yet their relative performances are strongly debated. Using 12 independent common lizard populations, we manipulated the adult sex ratio, a potentially important determinant of the intensity of sexual selection at a particular time and place. We investigated differences in the intensity of sexual selection, as estimated using three standard indices of sexual selection-the standardized selection gradient (β'), the opportunity of selection (I), and the Bateman gradient (βss)--calculated for different pools of individuals and different fitness proxies. We show that results based on estimates of I were the opposite of those derived from the other indices, whereas results based on estimates of β' were consistent with predictions derived from knowledge about the species' mating system. In addition, our estimates of the strength and direction of sexual selection depended on both the fitness proxy used and the pool of individuals included in the analysis. These observations demonstrate inconsistencies in distinct measures of sexual selection and underscore the need for caution when comparing studies and species.