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.

Visual-gustatory interaction: orbitofrontal and insular cortices mediate the effect of high-calorie visual food cues on taste pleasantness.

Vision provides a primary sensory input for food perception. It raises expectations on taste and nutritional value and drives acceptance or rejection. So far, the impact of visual food cues varying in energy content on subsequent taste integration remains unexplored. Using electrical neuroimaging, we assessed whether high- and low-calorie food cues differentially influence the brain processing and perception of a subsequent neutral electric taste. When viewing high-calorie food images, participants reported the subsequent taste to be more pleasant than when low-calorie food images preceded the identical taste. Moreover, the taste-evoked neural activity was stronger in the bilateral insula and the adjacent frontal operculum (FOP) within 100 ms after taste onset when preceded by high- versus low-calorie cues. A similar pattern evolved in the anterior cingulate (ACC) and medial orbitofrontal cortex (OFC) around 180 ms, as well as, in the right insula, around 360 ms. The activation differences in the OFC correlated positively with changes in taste pleasantness, a finding that is an accord with the role of the OFC in the hedonic evaluation of taste. Later activation differences in the right insula likely indicate revaluation of interoceptive taste awareness. Our findings reveal previously unknown mechanisms of cross-modal, visual-gustatory, sensory interactions underlying food evaluation.

Visuospatial working memory deficits and visual pursuit impairments are not directly related in schizophrenia.

OBJECTIVE: Patients with schizophrenia show deficits in visuospatial working memory and visual pursuit processes. It is currently unclear, however, whether both impairments are related to a common neuropathological origin. The purpose of the present study was therefore to examine the possible relations between the encoding and the discrimination of dynamic visuospatial stimuli in schizophrenia. METHOD: Sixteen outpatients with schizophrenia and 16 control subjects were asked to encode complex disc displacements presented on a screen. After a delay, participants had to identify the previously presented disc trajectory from a choice of six static linear paths, among which were five incorrect paths. The precision of visual pursuit eye movements during the initial presentation of the dynamic stimulus was assessed. The fixations and scanning time in definite regions of the six paths presented during the discrimination phase were investigated. RESULTS: In comparison with controls, patients showed poorer task performance, reduced pursuit accuracy during incorrect trials and less time scanning the correct stimulus or the incorrect paths approximating its global structure. Patients also spent less time scanning the leftmost portion of the correct path even when making a correct choice. The accuracy of visual pursuit and head movements, however, was not correlated with task performance. CONCLUSIONS: The present study provides direct support for the hypothesis that active integration of visuospatial information within working memory is deficient in schizophrenia. In contrast, a general impairment of oculomotor mechanisms involved in smooth pursuit did not appear to be directly related to lower visuospatial working memory performance in schizophrenia.

Rpe65-Gene Transfer Using an Integration-Deficient Lentiviral Vector

Purpose: We previously demonstrated efficient retinal rescue of RPE65 mouse models (Rpe65-/- (Bemelmans et al, 2006) and Rpe65R91W/R91W mice) using a HIV1-derived lentiviral vector encoding for the mouse RPE65 cDNA. In order to optimize a lentiviral vector as an alternative tool for RPE65-derived Leber Congenital Amaurosis clinical trials, we evaluated the efficiency of an integration-deficient lentiviral vector (IDLV) encoding the human RPE65 cDNA to restore retinal function in the Rpe65R91W/R91W mice. Methods: An HIV-1-derived lentiviral vector expressing either the hrGFPII or the human Rpe65 cDNA under the control of a 0.8 kb fragment of the human Rpe65 promoter (R0.8) was produced by transient transfection of 293T cells. A LQ-integrase mutant was used to generate the IDLV vectors. IDLV-R0.8-hRPE65 or hrGFPII were injected subretinally into 1 month-old Rpe65R91W/R91W mice. Functional rescue was assessed by ERG (1 and 3 months post-injection) and cone survival by immunohistology. Results: An increased light sensitivity was detected by scotopic ERG in animals injected with IDLV-R0.8-hRPE65 compared to hrGFPII-treated animals or untreated mice. However the improvement was delayed compared to integration-proficient LV and observed at 3 months but not 1 month post-injection. Immunolabelling of cone markers showed an increased number of cones in the transduced area compared to control groups. Conclusions: The IDLV-R0.8-hRPE65 vectors allow retinal improvement in the Rpe65R91W/R91W mice. Both rod function and cone survival were demonstrated even if there is a delay in the rescue as assessed by scotopic ERG. Integration-deficient vectors minimize insertional mutagenesis and thus are safer candidates for human application. Further experiments using large animals are now needed to validate correct gene transfer and expression of the RPE65 gene as well as tolerance of the vector after subretinal injection before envisaging a clinical trial application.

Stem Cell Transplantation for Retinal Degenerations

Within the last few years, several reports have revealed that cell transplantation can be an effective way to replace lost neurons in the central nervous system (CNS) of patients affected with neurodegenerative diseases. Concerning the retina, the concept that newborn photoreceptors can integrate the retina and restore some visual functions was univocally demonstrated recently in the mouse eye (MacLaren et al. 2006) and remains to be achieved in human. These results pave the way to a standard approach in regenerative medicine aiming to replace lost photoreceptors. With the discovery of stem cells a great hope has appeared towards elaborating protocols to generate adequate cells to restore visual function in different retinal degeneration processes. Retinal stem cells (RSCs) are good candidates to repair the retina and are present throughout the retina development, including adulthood. However, neonatal mouse RSCs derived from the radial glia population have a different potential to proliferate and differentiate in comparison to adult RSCs. Moreover, we observed that adult mouse RSCs, depending on the culture conditions, have a marked tendency to transform, whereas neonatal RSCs show subtle chromosome abnormalities only after extensive expansion. These characteristics should help to identify the optimal cell source and culture conditions for cell transplantation studies. These results will be discussed in light of other studies using RSCs as well as embryonic stem cells. Another important factor to consider is the host environment, which plays a crucial role for cell integration and which was poorly studied in the normal and the diseased retina. Nonetheless, important results were recently generated to reconsider cell transplantation strategy. Perspectives to enhance cell integration by manipulating the environment will also be presented.

Exploration of the visual system : Part 2. In vivo analysis methods : virtual-reality optomotor system, fundus examination and fluorescent angiography

The mouse has emerged as an animal model for many diseases. At IRO, we have used this animal to understand the development of many eye diseases and treatment of some of them. Precise evaluation of vision is a prerequisite for both these approaches. In this unit we describe three ways to measure vision: testing the optokinetic response, and evaluating the fundus by direct observation and by fluorescent angiography.

Olfactory traces and spatial learning in rats.

We conducted an experiment to assess the use of olfactory traces for spatial orientation in an open environment in rats, Rattus norvegicus. We trained rats to locate a food source at a fixed location from different starting points, in the presence or absence of visual information. A single food source was hidden in an array of 19 petri dishes regularly arranged in an open-field arena. Rats were trained to locate the food source either in white light (with full access to distant visuospatial information) or in darkness (without any visual information). In both cases, the goal was in a fixed location relative to the spatial frame of reference. The results of this experiment revealed that the presence of noncontrolled olfactory traces coherent with the spatial frame of reference enables rats to locate a unique position as accurately in darkness as with full access to visuospatial information. We hypothesize that the olfactory traces complement the use of other orientation mechanisms, such as path integration or the reliance on visuospatial information. This experiment demonstrates that rats can rely on olfactory traces for accurate orientation, and raises questions about the establishment of such traces in the absence of any other orientation mechanism. Copyright 1998 The Association for the Study of Animal Behaviour.

Perinatal choline supplementation reveals a dissociation between two types of spatial strategies.

Choline supplementation improving memory functions in rodents is assumed to increase the synthesis and release of acetylcholine in the brain. We have found that a combined pre- and postnatal supplementation results in long-lasting facilitation of spatial memory in juvenile rats when training was conducted in presence of a local salient cue. The present work was aimed at analysing the effects of peri- and postnatal choline supplementation on spatial abilities of naive adult rats. Rats given a perinatal choline supplementation were trained in various cued procedures of the Morris navigation task when aged 5 months. The treatment had a specific effect of reducing the escape latency of the rats when the platform was at a fixed position in space and surrounded by a suspended cue. This effect was associated with an increased spatial bias when the cue and platform were removed. In this condition, the control rats showed impaired spatial discrimination following the removal of the target cue, most likely due to an overshadowing of the distant environmental cues. This impairment was not observed in the treated rats. Further training with the suspended cue at unpredictable places in the pool revealed longer escape latencies in the control than in the treated rats suggesting that this procedure induced a selective perturbation of the normal but not of the treated rats. A special probe trial with the cue at an irrelevant position and no escape platform revealed a significant bias of the control rats toward the cue and of the treated rats toward the uncued spatial escape position. This behavioural dissociation suggests that a salient cue associated with the target induces an alternative "non spatial" guidance strategy in normal rats, with the risk of overshadowing of the more distant spatial cues. In this condition, the choline supplementation facilities a spatial reliance on the cue, that is an overall facilitation of learning a set of spatial relations between several visual cues. As a consequence, the improved escape in presence of the cue is associated with a stronger memory of the spatial position following disappearance of the cue. This and previous observations suggest that a specific spatial attention process relies on the buffering of highly salient visual cues.to facilitate integration of their relative position in the environment.

Automatic top-down processing explains common left occipito-temporal responses to visual words and objects.

Previous studies have demonstrated that a region in the left ventral occipito-temporal (LvOT) cortex is highly selective to the visual forms of written words and objects relative to closely matched visual stimuli. Here, we investigated why LvOT activation is not higher for reading than picture naming even though written words and pictures of objects have grossly different visual forms. To compare neuronal responses for words and pictures within the same LvOT area, we used functional magnetic resonance imaging adaptation and instructed participants to name target stimuli that followed briefly presented masked primes that were either presented in the same stimulus type as the target (word-word, picture-picture) or a different stimulus type (picture-word, word-picture). We found that activation throughout posterior and anterior parts of LvOT was reduced when the prime had the same name/response as the target irrespective of whether the prime-target relationship was within or between stimulus type. As posterior LvOT is a visual form processing area, and there was no visual form similarity between different stimulus types, we suggest that our results indicate automatic top-down influences from pictures to words and words to pictures. This novel perspective motivates further investigation of the functional properties of this intriguing region.

Hydrogeophysical data integration at larger scales: Application of Bayesian sequential simulation for the characterization of heterogeneous alluvial aquifers

Knowledge of the spatial distribution of hydraulic conductivity (K) within an aquifer is critical for reliable predictions of solute transport and the development of effective groundwater management and/or remediation strategies. While core analyses and hydraulic logging can provide highly detailed information, such information is inherently localized around boreholes that tend to be sparsely distributed throughout the aquifer volume. Conversely, larger-scale hydraulic experiments like pumping and tracer tests provide relatively low-resolution estimates of K in the investigated subsurface region. As a result, traditional hydrogeological measurement techniques contain a gap in terms of spatial resolution and coverage, and they are often alone inadequate for characterizing heterogeneous aquifers. Geophysical methods have the potential to bridge this gap. The recent increased interest in the application of geophysical methods to hydrogeological problems is clearly evidenced by the formation and rapid growth of the domain of hydrogeophysics over the past decade (e.g., Rubin and Hubbard, 2005).

Directed integration of new insulated lentiviral vectors to heterochromatin towards safer gene transfer to stem cells

The need for better gene transfer systems towards improved risk=benefit balance for patients remains a major challenge in the clinical translation of gene therapy (GT). We have investigated the improvement of integrating vectors safety in combining (i) new short synthetic genetic insulator elements (GIE) and (ii) directing genetic integration to heterochromatin. We have designed SIN-insulated retrovectors with two candidate GIEs and could identify a specific combination of insulator 2 repeats which translates into best functional activity, high titers and boundary effect in both gammaretro (p20) and lentivectors (DCaro4) (see Duros et al, abstract ibid). Since GIEs are believed to shield the transgenic cassette from inhibitory effects and silencing, DCaro4 has been further tested with chimeric HIV-1 derived integrases which comprise C-ter chromodomains targeting heterochromatin through either histone H3 (ML6chimera) or methylatedCpGislands (ML10). With DCaro4 only and both chimeras, a homogeneous expression is evidenced in over 20% of the cells which is sustained over time. With control lentivectors, less than 2% of cells express GFP as compared to background using a control double-mutant in both catalytic and ledgf binding-sites; in addition, a two-times increase of expression can be induced with histone deacetylase inhibitors. Our approach could significantly reduce integration into open chromatin sensitive sites in stem cells at the time of transduction, a feature which might significantly decrease subsequent genotoxicity, according to X-SCIDs patients data.Work performed with the support of EC-DG research within the FP6-Network of Excellence, CLINIGENE: LSHB-CT-2006-018933

Long-term fluctuation of relative afferent pupillary defect in subjects with normal visual function.

PURPOSE: To determine whether the relative afferent pupillary defect (RAPD) remains constant over time in normal subjects. METHODS: Seventeen normal subjects were tested with infrared pupillography and automated perimetry in four sessions over 3 years. The changes in RAPD and visual field asymmetry between testing sessions were compared. RESULTS: The range of RAPD was 0.0 to 0.3 log unit, and the difference in the mean deviation between the eyes on automated static perimetry was 0 to 3 dB. Eight subjects repeatedly had an RAPD in the same eye. There was no correlation between the RAPD and the visual field asymmetry at the same visit. Changes in the magnitude of the RAPD between any two sessions were typically small (median, 0.08 log unit; 25th percentile, 0.04 log unit; 75th percentile, 0.15 log unit). CONCLUSIONS: Some normal subjects may show a persistent but small RAPD in the absence of detectable pathologic disease. Therefore, an isolated RAPD in the range of 0.3 log unit that is not associated with any other significant historical or clinical finding should probably be considered benign.

Visual binding abilities in the initial and advanced stages of schizophrenia

OBJECTIVE: The study tests the hypothesis that intramodal visual binding is disturbed in schizophrenia and should be detectable in all illness stages as a stable trait marker. METHOD: Three groups of patients (rehospitalized chronic schizophrenic, first admitted schizophrenic and schizotypal patients believed to be suffering from a pre-schizophrenic prodrome) and a group of normal control subjects were tested on three tasks targeting visual 'binding' abilities (Muller-Lyer's illusion and two figure detection tasks) in addition to control parameters such as reaction time, visual selective attention, Raven's test and two conventional cortical tasks of spatial working memory (SWM) and a global local test. RESULTS: Chronic patients had a decreased performance on the binding tests. Unexpectedly, the prodromal group exhibited an enhanced Gestalt extraction on these tests compared both to schizophrenic patients and to healthy subjects. Furthermore, chronic schizophrenia was associated with a poor performance on cortical tests of SWM, global local and on Raven. This association appears to be mediated by or linked to the chronicity of the illness. CONCLUSION: The study confirms a variety of neurocognitive deficits in schizophrenia which, however, in this sample seem to be linked to chronicity of illness. However, certain aspects of visual processing concerned with Gestalt extraction deserve attention as potential vulnerability- or prodrome- indicators. The initial hypothesis of the study is rejected.