Financial Markets and Real Ecinomy: Four Essays in International Trade

Financial markets play an important role in an economy performing various functions like mobilizing and pooling savings, producing information about investment opportunities, screening and monitoring investments, implementation of corporate governance, diversification and management of risk. These functions influence saving rates, investment decisions, technological innovation and, therefore, have important implications for welfare. In my PhD dissertation I examine the interplay of financial and product markets by looking at different channels through which financial markets may influence an economy.My dissertation consists of four chapters. The first chapter is a co-authored work with Martin Strieborny, a PhD student from the University of Lausanne. The second chapter is a co-authored work with Melise Jaud, a PhD student from the Paris School of Economics. The third chapter is co-authored with both Melise Jaud and Martin Strieborny. The last chapter of my PhD dissertation is a single author paper.Chapter 1 of my PhD thesis analyzes the effect of financial development on growth of contract intensive industries. These industries intensively use intermediate inputs that neither can be sold on organized exchange, nor are reference-priced (Levchenko, 2007; Nunn, 2007). A typical example of a contract intensive industry would be an industry where an upstream supplier has to make investments in order to customize a product for needs of a downstream buyer. After the investment is made and the product is adjusted, the buyer may refuse to meet a commitment and trigger ex post renegotiation. Since the product is customized to the buyer's needs, the supplier cannot sell the product to a different buyer at the original price. This is referred in the literature as the holdup problem. As a consequence, the individually rational suppliers will underinvest into relationship-specific assets, hurting the downstream firms with negative consequences for aggregate growth. The standard way to mitigate the hold up problem is to write a binding contract and to rely on the legal enforcement by the state. However, even the most effective contract enforcement might fail to protect the supplier in tough times when the buyer lacks a reliable source of external financing. This suggests the potential role of financial intermediaries, banks in particular, in mitigating the incomplete contract problem. First, financial products like letters of credit and letters of guarantee can substantially decrease a risk and transaction costs of parties. Second, a bank loan can serve as a signal about a buyer's true financial situation, an upstream firm will be more willing undertake relationship-specific investment knowing that the business partner is creditworthy and will abstain from myopic behavior (Fama, 1985; von Thadden, 1995). Therefore, a well-developed financial (especially banking) system should disproportionately benefit contract intensive industries.The empirical test confirms this hypothesis. Indeed, contract intensive industries seem to grow faster in countries with a well developed financial system. Furthermore, this effect comes from a more developed banking sector rather than from a deeper stock market. These results are reaffirmed examining the effect of US bank deregulation on the growth of contract intensive industries in different states. Beyond an overall pro-growth effect, the bank deregulation seems to disproportionately benefit the industries requiring relationship-specific investments from their suppliers.Chapter 2 of my PhD focuses on the role of the financial sector in promoting exports of developing countries. In particular, it investigates how credit constraints affect the ability of firms operating in agri-food sectors of developing countries to keep exporting to foreign markets.Trade in high-value agri-food products from developing countries has expanded enormously over the last two decades offering opportunities for development. However, trade in agri-food is governed by a growing array of standards. Sanitary and Phytosanitary standards (SPS) and technical regulations impose additional sunk, fixed and operating costs along the firms' export life. Such costs may be detrimental to firms' survival, "pricing out" producers that cannot comply. The existence of these costs suggests a potential role of credit constraints in shaping the duration of trade relationships on foreign markets. A well-developed financial system provides the funds to exporters necessary to adjust production processes in order to meet quality and quantity requirements in foreign markets and to maintain long-standing trade relationships. The products with higher needs for financing should benefit the most from a well functioning financial system. This differential effect calls for a difference-in-difference approach initially proposed by Rajan and Zingales (1998). As a proxy for demand for financing of agri-food products, the sanitary risk index developed by Jaud et al. (2009) is used. The empirical literature on standards and norms show high costs of compliance, both variable and fixed, for high-value food products (Garcia-Martinez and Poole, 2004; Maskus et al., 2005). The sanitary risk index reflects the propensity of products to fail health and safety controls on the European Union (EU) market. Given the high costs of compliance, the sanitary risk index captures the demand for external financing to comply with such regulations.The prediction is empirically tested examining the export survival of different agri-food products from firms operating in Ghana, Mali, Malawi, Senegal and Tanzania. The results suggest that agri-food products that require more financing to keep up with food safety regulation of the destination market, indeed sustain longer in foreign market, when they are exported from countries with better developed financial markets.Chapter 3 analyzes the link between financial markets and efficiency of resource allocation in an economy. Producing and exporting products inconsistent with a country's factor endowments constitutes a serious misallocation of funds, which undermines competitiveness of the economy and inhibits its long term growth. In this chapter, inefficient exporting patterns are analyzed through the lens of the agency theories from the corporate finance literature. Managers may pursue projects with negative net present values because their perquisites or even their job might depend on them. Exporting activities are particularly prone to this problem. Business related to foreign markets involves both high levels of additional spending and strong incentives for managers to overinvest. Rational managers might have incentives to push for exports that use country's scarce factors which is suboptimal from a social point of view. Export subsidies might further skew the incentives towards inefficient exporting. Management can divert the export subsidies into investments promoting inefficient exporting.Corporate finance literature stresses the disciplining role of outside debt in counteracting the internal pressures to divert such "free cash flow" into unprofitable investments. Managers can lose both their reputation and the control of "their" firm if the unpaid external debt triggers a bankruptcy procedure. The threat of possible failure to satisfy debt service payments pushes the managers toward an efficient use of available resources (Jensen, 1986; Stulz, 1990; Hart and Moore, 1995). The main sources of debt financing in the most countries are banks. The disciplining role of banks might be especially important in the countries suffering from insufficient judicial quality. Banks, in pursuing their rights, rely on comparatively simple legal interventions that can be implemented even by mediocre courts. In addition to their disciplining role, banks can promote efficient exporting patterns in a more direct way by relaxing credit constraints of producers, through screening, identifying and investing in the most profitable investment projects. Therefore, a well-developed domestic financial system, and particular banking system, would help to push a country's exports towards products congruent with its comparative advantage.This prediction is tested looking at the survival of different product categories exported to US market. Products are identified according to the Euclidian distance between their revealed factor intensity and the country's factor endowments. The results suggest that products suffering from a comparative disadvantage (labour-intensive products from capital-abundant countries) survive less on the competitive US market. This pattern is stronger if the exporting country has a well-developed banking system. Thus, a strong banking sector promotes exports consistent with a country comparative advantage.Chapter 4 of my PhD thesis further examines the role of financial markets in fostering efficient resource allocation in an economy. In particular, the allocative efficiency hypothesis is investigated in the context of equity market liberalization.Many empirical studies document a positive and significant effect of financial liberalization on growth (Levchenko et al. 2009; Quinn and Toyoda 2009; Bekaert et al., 2005). However, the decrease in the cost of capital and the associated growth in investment appears rather modest in comparison to the large GDP growth effect (Bekaert and Harvey, 2005; Henry, 2000, 2003). Therefore, financial liberalization may have a positive impact on growth through its effect on the allocation of funds across firms and sectors.Free access to international capital markets allows the largest and most profitable domestic firms to borrow funds in foreign markets (Rajan and Zingales, 2003). As domestic banks loose some of their best clients, they reoptimize their lending practices seeking new clients among small and younger industrial firms. These firms are likely to be more risky than large and established companies. Screening of customers becomes prevalent as the return to screening rises. Banks, ceteris paribus, tend to focus on firms operating in comparative-advantage sectors because they are better risks. Firms in comparative-disadvantage sectors finding it harder to finance their entry into or survival in export markets either exit or refrain from entering export markets. On aggregate, one should therefore expect to see less entry, more exit, and shorter survival on export markets in those sectors after financial liberalization.The paper investigates the effect of financial liberalization on a country's export pattern by comparing the dynamics of entry and exit of different products in a country export portfolio before and after financial liberalization.The results suggest that products that lie far from the country's comparative advantage set tend to disappear relatively faster from the country's export portfolio following the liberalization of financial markets. In other words, financial liberalization tends to rebalance the composition of a country's export portfolio towards the products that intensively use the economy's abundant factors.

Information, learning, and risk in financial markets

Cette thèse comprend trois essais qui abordent l'information le processus d'ap-prentissage ainsi que le risque dans les marchés finances. Elle se concentre d'abord sur les implications à l'équilibre de l'hétérogénéité des agents à travers un processus d'apprentissage comprtemental et de mise à jour de l'information. De plus, elle examine les effets du partage des risques dans un reseau entreprise-fournisseur. Le premier chapitre étudie les effets du biais de disponibili sur l'évaluation des actifs. Ce biais décrit le fait que les agents surestiment l'importance de l'information acquise via l'expérience personnelle. L'hétérogénéité restante des différentes perceptions individuelles amène à une volonté d'échanges. Conformé¬ment aux données empiriques, les jeunes agents échangent plus mais en même temps souffrent d'une performance inférieure. Le deuxième chapitre se penche sur l'impact qu'ont les différences de modelisation entre les agents sur leurs percevons individuelles du processus de prix, dans le contexte des projections de modèles. Les agents sujets à un biais de projection pensent être représentatifs et interprètent les opinions des autres agents comme du bruit. Les agents, avec des modèles plus persistants, perçoivent que les prix réagissent de façon excessive lors des périodes de turbulence. Le troisième chapitre analyse l'impact du partage des risques dans la relation entreprise-fournisseur sur la décision optimale de financement de l'entreprise. Il étudie l'impact sur l'optimisation de la structure du capital ainsi que sur le coût du capital. Les résultats indiquent en particulier qu'un fournisseur avec un effet de levier faible est utile pour le financement d'un nouveau projet d'investissement. Pour des projets très rentables et des fournisseurs à faible effet de levier, le coût des capitaux propres de l'entreprise peut diminuer.

Three essays on the psychology of investment and financial markets

Préface My thesis consists of three essays where I consider equilibrium asset prices and investment strategies when the market is likely to experience crashes and possibly sharp windfalls. Although each part is written as an independent and self contained article, the papers share a common behavioral approach in representing investors preferences regarding to extremal returns. Investors utility is defined over their relative performance rather than over their final wealth position, a method first proposed by Markowitz (1952b) and by Kahneman and Tversky (1979), that I extend to incorporate preferences over extremal outcomes. With the failure of the traditional expected utility models in reproducing the observed stylized features of financial markets, the Prospect theory of Kahneman and Tversky (1979) offered the first significant alternative to the expected utility paradigm by considering that people focus on gains and losses rather than on final positions. Under this setting, Barberis, Huang, and Santos (2000) and McQueen and Vorkink (2004) were able to build a representative agent optimization model which solution reproduced some of the observed risk premium and excess volatility. The research in behavioral finance is relatively new and its potential still to explore. The three essays composing my thesis propose to use and extend this setting to study investors behavior and investment strategies in a market where crashes and sharp windfalls are likely to occur. In the first paper, the preferences of a representative agent, relative to time varying positive and negative extremal thresholds are modelled and estimated. A new utility function that conciliates between expected utility maximization and tail-related performance measures is proposed. The model estimation shows that the representative agent preferences reveals a significant level of crash aversion and lottery-pursuit. Assuming a single risky asset economy the proposed specification is able to reproduce some of the distributional features exhibited by financial return series. The second part proposes and illustrates a preference-based asset allocation model taking into account investors crash aversion. Using the skewed t distribution, optimal allocations are characterized as a resulting tradeoff between the distribution four moments. The specification highlights the preference for odd moments and the aversion for even moments. Qualitatively, optimal portfolios are analyzed in terms of firm characteristics and in a setting that reflects real-time asset allocation, a systematic over-performance is obtained compared to the aggregate stock market. Finally, in my third article, dynamic option-based investment strategies are derived and illustrated for investors presenting downside loss aversion. The problem is solved in closed form when the stock market exhibits stochastic volatility and jumps. The specification of downside loss averse utility functions allows corresponding terminal wealth profiles to be expressed as options on the stochastic discount factor contingent on the loss aversion level. Therefore dynamic strategies reduce to the replicating portfolio using exchange traded and well selected options, and the risky stock.

Patients' preferences on information and involvement in decision-making for gastrointestinal surgery

Objective: The relationship between physicians and patients has undergone¦important changes, and the current emancipation of patients has led to¦a real partnership in medical decision-making. This study aimed to assess¦patients' preferences on different aspects of decision-making during treatment¦and potential complications, as well as the amount and type of preoperative¦information before visceral surgery.¦Methods: Prospective non-randomized study based on a questionnaire given¦to 253 consecutive patients scheduled for elective GI surgery.¦Results: Concerning surgical complications or treatment in the intensive care¦unit, 64% of patients wished to take actively part in any medical decisions.¦The respective figures for cardiac resuscitation and treatment limitations were¦89% and 60%. About information, 73%, 77% and 47% of patients wish¦detailed information, information on a potential ICUhospitalization and cardiac¦resuscitation, respectively. Elderly and low-educated patients were significantly¦less interested in shared medical decision-making (p = 0·003 and 0·015) and in¦information receiving (p = 0·03 and 0·05). Similarly, involvement of the family¦in decision-making was significantly less important in elderly and male patients¦(p = 0·05 and 0·03 respectively). Neither the type of operation (minor or major)¦nor the severity of disease (malignancies vs. non-malignancies) was a significant¦factor for shared decision-making, information or family involvement.¦Conclusion: The vast majority of surgical patients clearly want to get adequate¦preoperative information about their disease and the planned treatment. They¦also consider it as crucial to be involved in any kind of decision-making for¦treatment and complications. The family's role is limited to support the treating¦physicians if the patient is unable to participate in taking decisions.

Patients presenting with somatic complaints in general practice: depression, anxiety and somatoform disorders are frequent and associated with psychosocial stressors.

BACKGROUND: Mental disorders in primary care patients are frequently associated with physical complaints that can mask the disorder. There is insufficient knowledge concerning the role of anxiety, depression, and somatoform disorders in patients presenting with physical symptoms. Our primary objective was to determine the prevalence of depression, anxiety, and somatoform disorders among primary care patients with a physical complaint. We also investigated the relationship between cumulated psychosocial stressors and mental disorders. METHODS: We conducted a multicentre cross-sectional study in twenty-one private practices and in one academic primary care centre in Western Switzerland. Randomly selected patients presenting with a spontaneous physical complaint were asked to complete the self-administered Patient Health Questionnaire (PHQ) between November 2004 and July 2005. The validated French version of the PHQ allowed the diagnosis of mental disorders (DSM-IV criteria) and the analyses of exposure to psychosocial stressors. RESULTS: There were 917 patients exhibiting at least one physical symptom included. The rate of depression, anxiety, and somatoform disorders was 20.0% (95% confidence interval [CI] = 17.4% to 22.7%), 15.5% (95% CI = 13.2% to 18.0%), and 15.1% (95% CI = 12.8% to 17.5%), respectively. Psychosocial stressors were significantly associated with mental disorders. Patients with an accumulation of psychosocial stressors were more likely to present anxiety, depression, or somatoform disorders, with an increase of 2.2 fold (95% CI = 2.0 to 2.5) for each additional stressor. CONCLUSIONS: The investigation of mental disorders and psychosocial stressors among patients with physical complaints is relevant in primary care. Psychosocial stressors should be explored as potential epidemiological causes of mental disorders.

Patients presenting with somatic complaints in general practice : dépression, anxiety and somatoform disorders are frequent and associated with psychosocial stressors

RAPPORT DE SYNTHÈSE Introduction En médecine de premier recours, les plaintes physiques sont fréquemment associées à des troubles dépressifs, anxieux et somatoformes et peuvent les masquer. Il est fréquemment reporté que ces troubles mentaux ont tendance à être insuffisamment diagnostiqués. Par ailleurs, peu d'études ont été conduites en médecine de premier recours concernant la possible association entre facteurs de stress psychosociaux et troubles dépressifs, anxieux et somatoformes. Objectifs Les objectifs étaient de déterminer la prévalence des troubles dépressifs, anxieux et somatoformes chez des patients consultant avec une plainte physique en médecine de premier recours, ainsi que d'explorer la possible association entre ces troubles mentaux et des facteurs de stress psychosociaux. Méthodes Nous avons conduit une étude transversale, multicentrique parmi vingt et un cabinets médicaux en Suisse Romande et la Policlinique Médicale Universitaire de Lausanne. Les sujets étaient sélectionnés aléatoirement parmi des patients qui avaient présenté spontanément au moins une plainte physique et qui avaient consulté lors d'une demi- journée de consultation considérée pour l'étude. Les patients inclus ont rempli l'auto- questionnaire Patient Health Questionnaire (PHQ) entre novembre 2004 et juillet 2005. Nous avons utilisé la version française et validée du PHQ qui permet le diagnostic des principaux troubles mentaux selon les critères du DSM-IV et l'analyse de l'exposition aux facteurs de stress psychosociaux. Résultats Neuf cent dix-sept patients se présentant avec au moins une plainte physique ont été inclus. Le taux de troubles dépressifs, anxieux et somatoformes a été de 20,0% (intervalle de confiance [IC] à 95% = 17,4%-22,7%), 15,5% (IC 95% = 13,2%- 18,0%) et 15,1% (IC 95% = 12,8%~17,5%), respectivement. Les facteurs de stress psychosociaux ont été significativement associés aux troubles mentaux. Les patients avec une accumulation de facteurs de stress psychosociaux ont été le plus souvent déprimés, anxieux ou ont manifesté des troubles somatoformes, avec une augmentation par un facteur 2,2 (IC 95% = 2,0-2,5) pour chaque facteur additionnel. Conclusions Bien que la relation entre facteurs de stress psychosociaux et trouble dépressif soit bien établie, cette étude montre qu'il existe un lien entre ces facteurs de stress et les troubles dépressifs, anxieux et somatoformes. L'investigation de ces troubles mentaux chez des patients consultant avec un symptôme physique en médecine de premier recours est pertinente. D'autres explorations sont nécessaires pour investiguer le bénéfice potentiel d'une prise en charge intégrée des facteurs de stress psychosociaux sur la diminution des plaintes physiques et des troubles mentaux chez les patients que suivent les médecins de premier recours.

Patients' preferences on information and involvement in decision making for gastrointestinal surgery.

BACKGROUND: The relationship between physicians and patients has undergone important changes, and the current emancipation of patients has led to a real partnership in medical decision making. The present study aimed to assess patients' preferences on different aspects of decision making during treatment and potential complications, as well as the amount and type of preoperative information wanted before visceral surgery. METHODS: This was a prospective non-randomized study based on a questionnaire given to 253 consecutive patients scheduled for elective gastrointestinal surgery. RESULTS: In considering surgical complications or treatment in the intensive care unit, 64 % of patients wished to take an active role in any medical decisions. The respective figures for cardiac resuscitation and treatment limitations were 89 and 60 %. As for information, 73, 77, and 47 % of patients wish detailed information, information on a potential ICU hospitalization, and knowledge of cardiac resuscitation, respectively. Elderly and low-educated patients were significantly less interested in shared medical decision making (p = 0.003 and 0.015), and in receiving information (p = 0.03 and 0.05). Similarly, involvement of the family in decision making was significantly less important to elderly and male patients (p = 0.05 and 0.03, respectively). Neither the type of operation (minor or major) nor the severity of disease (malignancies versus non-malignancies) was a significant factor for shared decision making, information, or family involvement. CONCLUSIONS: The vast majority of surgical patients clearly want to get adequate preoperative information about their disease and the planned treatment. They also consider it crucial to be involved in any kind of decision making for treatment and complications. For most patients, the family role is limited to supporting the treating physicians if the patient is unable to participate in decision making.

Information and risk management during the first trimester care for pregnant women: Some reflections about the ethical challenges and the legal framework in Switzerland. [L'information et la gestion des risques dans le suivi de la grossesse lors du 1er trimestre : quelques réflexions sur le défi éthique et le cadre légal en Suisse.]

The progress in prenatal medicine raises complex questions with respect to the physician-patient relationship. The physician needs to reconcile medical aspects, ethical principles as well as judicial norms. Already, during the first trimester, the physician has to put into practice the schedule combining for each individual pregnancy physical, laboratory and other appropriate exams. Physicians are under the obligation to inform in a clear and comprehensive way without creating unnecessary anxiety for their patients. Legal requirements include informed consent, the respect for the patient's right to self-determination, and compliance with the Swiss federal law on genetic testing, especially with its articles on prenatal screening and diagnosis. This article discusses the complexity of obstetrical practice when it comes to delivering adequate information within the scope of ethical and legal requirements in Switzerland. L'évolution de la médecine prénatale soulève des enjeux complexes dans la relation médecin-patient. Il s'agit de concilier à la fois les aspects médicaux, les principes éthiques et les normes juridiques. Dès le premier trimestre de la grossesse le médecin doit poser le cadre du suivi et des examens appropriés pour chaque grossesse. Son devoir est d'informer de manière claire et précise sans inquiéter inutilement, en respectant l'exigence légale d'un consentement éclairé et plus largement le droit de la patiente à l'autodétermination ainsi que le cadre de la loi fédérale suisse sur l'analyse génétique humaine dans le domaine du dépistage et du diagnostic prénatal. Cet article discute de la complexité de l'information et de l'application des principes éthiques et légaux dans la pratique obstétricale en Suisse.

T-Coffee: a web server for the multiple sequence alignment of protein and RNA sequences using structural information and homology extension.

This article introduces a new interface for T-Coffee, a consistency-based multiple sequence alignment program. This interface provides an easy and intuitive access to the most popular functionality of the package. These include the default T-Coffee mode for protein and nucleic acid sequences, the M-Coffee mode that allows combining the output of any other aligners, and template-based modes of T-Coffee that deliver high accuracy alignments while using structural or homology derived templates. These three available template modes are Expresso for the alignment of protein with a known 3D-Structure, R-Coffee to align RNA sequences with conserved secondary structures and PSI-Coffee to accurately align distantly related sequences using homology extension. The new server benefits from recent improvements of the T-Coffee algorithm and can align up to 150 sequences as long as 10,000 residues and is available from both http://www.tcoffee.org and its main mirror http://tcoffee.crg.cat.