Essays in general equilibrium asset pricing

ABSTRACT : Research in empirical asset pricing has pointed out several anomalies both in the cross section and time series of asset prices, as well as in investors' portfolio choice. This dissertation aims to discover the forces driving some of these "puzzling" asset pricing dynamics and portfolio decisions observed in the financial market. Through the dissertation I construct and study dynamic general equilibrium models of heterogeneous investors in the presence of frictions and evaluate quantitatively their implications for financial-market asset prices and portfolio choice. I also explore the potential roots of puzzles in international finance. Chapter 1 shows that, by introducing jointly endogenous no-default type of borrowing constraints and heterogeneous beliefs in a dynamic general-equilibrium economy, many empirical features of stock return volatility can be reproduced. While most of the research on stock return volatility is empirical, this paper provides a theoretical framework that is able to reproduce simultaneously the cross section and time series stylized facts concerning stock returns and their volatility. In contrast to the existing theoretical literature related to stock return volatility, I don't impose persistence or regimes in any of the exogenous state variables or in preferences. Volatility clustering, asymmetry in the stock return-volatility relationship, and pricing of multi-factor volatility components in the cross section all arise endogenously as a consequence of the feedback between the binding of no-default constraints and heterogeneous beliefs. Chapters 2 and 3 explore the implications of differences of opinion across investors in different countries for international asset pricing anomalies. Chapter 2 demonstrates that several international finance "puzzles" can be reproduced by a single risk factor which captures heterogeneous beliefs across international investors. These puzzles include: (i) home equity preference; (ii) the dependence of firm returns on local and foreign factors; (iii) the co-movement of returns and international capital flows; and (iv) abnormal returns around foreign firm cross-listing events in the local market. These are reproduced in a setup with symmetric information and in a perfectly integrated world with multiple countries and independent processes producing the same good. Chapter 3 shows that by extending this framework to multiple goods and correlated production processes; the "forward premium puzzle" arises naturally as a compensation for the heterogeneous expectations about the depreciation of the exchange rate held by international investors. Chapters 2 and 3 propose differences of opinion across international investors as the potential resolution of several international finance `puzzles'. In a globalized world where both capital and information flow freely across countries, this explanation seems more appealing than existing asymmetric information or segmented markets theories aiming to explain international finance puzzles.

General Equilibrium Analysis. A Century after Walras

2010 marks the hundredth anniversary of the death of Léon Walras, the brilliant originator and first formaliser of general equilibrium theory - one of the pillars of modern economic theory. In advancing much derided practical solutions Walras also displayed more concern for the problems of living in a second best world than is common in modern pure theories of the invisible hand, efficient market hypothesis, DSGE macroeconomics or the thinking of some contemporary free market admirers all based on general equilibrium theory. This book brings contributions from the likes of Kenneth Arrow, Alan Kirman, Richard Posner, Amartya Sen and Robert Solow to share their thoughts and reflections on the theoretical heritage of Léon Walras. Some authors reminisce on the part they played in the development of modern general economics theory; others reflect on the crucial part played by general equilibrium in the development of macroeconomics, microeconomics, growth theory, welfare economics and the theory of justice; others still complain about the wrong path economic theory took under the influence of post 1945 developments in general equilibrium theory.

Essays in equilibrium asset pricing

Introduction This dissertation consists of three essays in equilibrium asset pricing. The first chapter studies the asset pricing implications of a general equilibrium model in which real investment is reversible at a cost. Firms face higher costs in contracting than in expanding their capital stock and decide to invest when their productive capital is scarce relative to the overall capital of the economy. Positive shocks to the capital of the firm increase the size of the firm and reduce the value of growth options. As a result, the firm is burdened with more unproductive capital and its value lowers with respect to the accumulated capital. The optimal consumption policy alters the optimal allocation of resources and affects firm's value, generating mean-reverting dynamics for the M/B ratios. The model (1) captures convergence of price-to-book ratios -negative for growth stocks and positive for value stocks - (firm migration), (2) generates deviations from the classic CAPM in line with the cross-sectional variation in expected stock returns and (3) generates a non-monotone relationship between Tobin's q and conditional volatility consistent with the empirical evidence. The second chapter proposes a standard portfolio-choice problem with transaction costs and mean reversion in expected returns. In the presence of transactions costs, no matter how small, arbitrage activity does not necessarily render equal all riskless rates of return. When two such rates follow stochastic processes, it is not optimal immediately to arbitrage out any discrepancy that arises between them. The reason is that immediate arbitrage would induce a definite expenditure of transactions costs whereas, without arbitrage intervention, there exists some, perhaps sufficient, probability that these two interest rates will come back together without any costs having been incurred. Hence, one can surmise that at equilibrium the financial market will permit the coexistence of two riskless rates that are not equal to each other. For analogous reasons, randomly fluctuating expected rates of return on risky assets will be allowed to differ even after correction for risk, leading to important violations of the Capital Asset Pricing Model. The combination of randomness in expected rates of return and proportional transactions costs is a serious blow to existing frictionless pricing models. Finally, in the last chapter I propose a two-countries two-goods general equilibrium economy with uncertainty about the fundamentals' growth rates to study the joint behavior of equity volatilities and correlation at the business cycle frequency. I assume that dividend growth rates jump from one state to other, while countries' switches are possibly correlated. The model is solved in closed-form and the analytical expressions for stock prices are reported. When calibrated to the empirical data of United States and United Kingdom, the results show that, given the existing degree of synchronization across these business cycles, the model captures quite well the historical patterns of stock return volatilities. Moreover, I can explain the time behavior of the correlation, but exclusively under the assumption of a global business cycle.

Population pharmacokinetic-pharmacodynamic modelling of angiotensin receptor blockade in healthy volunteers.

OBJECTIVE: To compare the pharmacokinetic and pharmacodynamic characteristics of angiotensin II receptor antagonists as a therapeutic class. DESIGN: Population pharmacokinetic-pharmacodynamic modelling study. METHODS: The data of 14 phase I studies with 10 different drugs were analysed. A common population pharmacokinetic model (two compartments, mixed zero- and first-order absorption, two metabolite compartments) was applied to the 2685 drug and 900 metabolite concentration measurements. A standard nonlinear mixed effect modelling approach was used to estimate the drug-specific parameters and their variabilities. Similarly, a pharmacodynamic model was applied to the 7360 effect measurements, i.e. the decrease of peak blood pressure response to intravenous angiotensin challenge recorded by finger photoplethysmography. The concentration of drug and metabolite in an effect compartment was assumed to translate into receptor blockade [maximum effect (Emax) model with first-order link]. RESULTS: A general pharmacokinetic-pharmacodynamic (PK-PD) model for angiotensin antagonism in healthy individuals was successfully built up for the 10 drugs studied. Representatives of this class share different pharmacokinetic and pharmacodynamic profiles. Their effects on blood pressure are dose-dependent, but the time course of the effect varies between the drugs. CONCLUSIONS: The characterisation of PK-PD relationships for these drugs gives the opportunity to optimise therapeutic regimens and to suggest dosage adjustments in specific conditions. Such a model can be used to further refine the use of this class of drugs.

Modelling changes in stable isotope compositions of minerals during net transfer reactions in a contact aureole: Wollastonite growth at the northern Hunter Mountain Batholith (Death Valley National Park, USA)

One of the world's largest wollastonite deposits was formed at the contact of the northern Hunter Mountain Batholith (California, USA) in Paleozoic sediments. Wollastonite occurs as zones of variable thickness surrounding layers or nodules of quartzite in limestones. A minimum formation temperature of 650 degrees C is estimated from isolated periclase-bearing lenses in that area. Contact metamorphism of siliceous carbonates has produced mineral assemblages that are consistent with heterogeneous, and partly limited infiltration of water-rich fluids, compatible with O-18/O-16 and C-13/C-12 isotopic patterns recorded in carbonates. Oxygen isotope compositions of wollastonites in the study area may also not require infiltration of large quantities of externally-derived fluids that were out of equilibrium with the rocks. 8180 values of wollastonite are high (14.8 parts per thousand to 25.0 parts per thousand; median: 19.7 parts per thousand) and close to those of the host limestone (19.7 parts per thousand to 28 parts per thousand; median: 24.9 parts per thousand) and quartz (18.0 parts per thousand. to 29.1 parts per thousand; median: 22.6 parts per thousand). Isotopic disequilibrium exists at quartz/wollastonite and wollastonite/calcite boundaries. Therefore, classical batch/Rayleigh fractionation models based on reactant and product equilibrium are not applicable to the wollastonite rims. An approach that relies on local instantaneous mass balance for the reactants, based on the wollastonite-forming reaction is suggested as an alternative way to model wollastonite reaction rims. This model reproduces many of the measured delta O-18 values of wollastonite reaction rims of the current study to within +/- 1 parts per thousand, even though the wollastonite compositions vary by almost 10 parts per thousand. (C) 2011 Elsevier B.V. All rights reserved.

Modelling the effect of minor orthopaedic day surgery on patient mood at the early post-operative period: a prospective population-based cohort study.

OBJECTIVE: The effect of minor orthopaedic day surgery (MiODS) on patient's mood. METHODS: A prospective population-based cohort study of 148 consecutive patients with age above 18 and less than 65, an American Society of Anaesthesiology (ASA) score of 1, and the requirement of general anaesthesia (GA) were included. The Medical Outcomes Study - Short Form 36 (SF-36), Beck Anxiety Inventory (BAI) and Beck Depression Inventory (BDI) were used pre- and post-operatively. RESULTS: The mean physical component score of SF-36 before surgery was 45.3 (SD=+/-10.1) and 8 weeks following surgery was 44.9 (SD=+/-11.04) [n=148, p=0.51, 95% CI=(-1.03 to 1.52)]. For the measurement of the changes in mood using BDI, BAI and SF-36, latent construct modelling was employed to increase validity. The covariance between mood pre- and post-operatively (cov=69.44) corresponded to a correlation coefficient, r=0.88 indicating that patients suffering a greater number of mood symptoms before surgery continue to have a greater number of symptoms following surgery. When the latent mood constructs were permitted to have different means the model fitted well with chi(2) (df=1)=0.86 for which p=0.77, thus the null hypothesis that MiODS has no effect on patient mood was rejected. CONCLUSIONS: MiODS affects patient mood which deteriorates at 8 weeks post-operatively regardless of the pre-operative patient mood state. More importantly patients suffering a greater number of mood symptoms before MiODS continue to have a greater number of symptoms following surgery.

Modelling tree population dynamics at the alpine and boreal tree-line ecotones in response to climate and land-use change

Summary Ecotones are sensitive to change because they contain high numbers of species living at the margin of their environmental tolerance. This is equally true of tree-lines, which are determined by attitudinal or latitudinal temperature gradients. In the current context of climate change, they are expected to undergo modifications in position, tree biomass and possibly species composition. Attitudinal and latitudinal tree-lines differ mainly in the steepness of the underlying temperature gradient: distances are larger at latitudinal tree-lines, which could have an impact on the ability of tree species to migrate in response to climate change. Aside from temperature, tree-lines are also affected on a more local level by pressure from human activities. These are also changing as a consequence of modifications in our societies and may interact with the effects of climate change. Forest dynamics models are often used for climate change simulations because of their mechanistic processes. The spatially-explicit model TreeMig was used as a base to develop a model specifically tuned for the northern European and Alpine tree-line ecotones. For the latter, a module for land-use change processes was also added. The temperature response parameters for the species in the model were first calibrated by means of tree-ring data from various species and sites at both tree-lines. This improved the growth response function in the model, but also lead to the conclusion that regeneration is probably more important than growth for controlling tree-line position and species' distributions. The second step was to implement the module for abandonment of agricultural land in the Alps, based on an existing spatial statistical model. The sensitivity of its most important variables was tested and the model's performance compared to other modelling approaches. The probability that agricultural land would be abandoned was strongly influenced by the distance from the nearest forest and the slope, bath of which are proxies for cultivation costs. When applied to a case study area, the resulting model, named TreeMig-LAb, gave the most realistic results. These were consistent with observed consequences of land-abandonment such as the expansion of the existing forest and closing up of gaps. This new model was then applied in two case study areas, one in the Swiss Alps and one in Finnish Lapland, under a variety of climate change scenarios. These were based on forecasts of temperature change over the next century by the IPCC and the HadCM3 climate model (ΔT: +1.3, +3.5 and +5.6 °C) and included a post-change stabilisation period of 300 years. The results showed radical disruptions at both tree-lines. With the most conservative climate change scenario, species' distributions simply shifted, but it took several centuries reach a new equilibrium. With the more extreme scenarios, some species disappeared from our study areas (e.g. Pinus cembra in the Alps) or dwindled to very low numbers, as they ran out of land into which they could migrate. The most striking result was the lag in the response of most species, independently from the climate change scenario or tree-line type considered. Finally, a statistical model of the effect of reindeer (Rangifer tarandus) browsing on the growth of Pinus sylvestris was developed, as a first step towards implementing human impacts at the boreal tree-line. The expected effect was an indirect one, as reindeer deplete the ground lichen cover, thought to protect the trees against adverse climate conditions. The model showed a small but significant effect of browsing, but as the link with the underlying climate variables was unclear and the model was not spatial, it was not usable as such. Developing the TreeMig-LAb model allowed to: a) establish a method for deriving species' parameters for the growth equation from tree-rings, b) highlight the importance of regeneration in determining tree-line position and species' distributions and c) improve the integration of social sciences into landscape modelling. Applying the model at the Alpine and northern European tree-lines under different climate change scenarios showed that with most forecasted levels of temperature increase, tree-lines would suffer major disruptions, with shifts in distributions and potential extinction of some tree-line species. However, these responses showed strong lags, so these effects would not become apparent before decades and could take centuries to stabilise. Résumé Les écotones son sensibles au changement en raison du nombre élevé d'espèces qui y vivent à la limite de leur tolérance environnementale. Ceci s'applique également aux limites des arbres définies par les gradients de température altitudinaux et latitudinaux. Dans le contexte actuel de changement climatique, on s'attend à ce qu'elles subissent des modifications de leur position, de la biomasse des arbres et éventuellement des essences qui les composent. Les limites altitudinales et latitudinales diffèrent essentiellement au niveau de la pente des gradients de température qui les sous-tendent les distance sont plus grandes pour les limites latitudinales, ce qui pourrait avoir un impact sur la capacité des espèces à migrer en réponse au changement climatique. En sus de la température, la limite des arbres est aussi influencée à un niveau plus local par les pressions dues aux activités humaines. Celles-ci sont aussi en mutation suite aux changements dans nos sociétés et peuvent interagir avec les effets du changement climatique. Les modèles de dynamique forestière sont souvent utilisés pour simuler les effets du changement climatique, car ils sont basés sur la modélisation de processus. Le modèle spatialement explicite TreeMig a été utilisé comme base pour développer un modèle spécialement adapté pour la limite des arbres en Europe du Nord et dans les Alpes. Pour cette dernière, un module servant à simuler des changements d'utilisation du sol a également été ajouté. Tout d'abord, les paramètres de la courbe de réponse à la température pour les espèces inclues dans le modèle ont été calibrées au moyen de données dendrochronologiques pour diverses espèces et divers sites des deux écotones. Ceci a permis d'améliorer la courbe de croissance du modèle, mais a également permis de conclure que la régénération est probablement plus déterminante que la croissance en ce qui concerne la position de la limite des arbres et la distribution des espèces. La seconde étape consistait à implémenter le module d'abandon du terrain agricole dans les Alpes, basé sur un modèle statistique spatial existant. La sensibilité des variables les plus importantes du modèle a été testée et la performance de ce dernier comparée à d'autres approches de modélisation. La probabilité qu'un terrain soit abandonné était fortement influencée par la distance à la forêt la plus proche et par la pente, qui sont tous deux des substituts pour les coûts liés à la mise en culture. Lors de l'application en situation réelle, le nouveau modèle, baptisé TreeMig-LAb, a donné les résultats les plus réalistes. Ceux-ci étaient comparables aux conséquences déjà observées de l'abandon de terrains agricoles, telles que l'expansion des forêts existantes et la fermeture des clairières. Ce nouveau modèle a ensuite été mis en application dans deux zones d'étude, l'une dans les Alpes suisses et l'autre en Laponie finlandaise, avec divers scénarios de changement climatique. Ces derniers étaient basés sur les prévisions de changement de température pour le siècle prochain établies par l'IPCC et le modèle climatique HadCM3 (ΔT: +1.3, +3.5 et +5.6 °C) et comprenaient une période de stabilisation post-changement climatique de 300 ans. Les résultats ont montré des perturbations majeures dans les deux types de limites de arbres. Avec le scénario de changement climatique le moins extrême, les distributions respectives des espèces ont subi un simple glissement, mais il a fallu plusieurs siècles pour qu'elles atteignent un nouvel équilibre. Avec les autres scénarios, certaines espèces ont disparu de la zone d'étude (p. ex. Pinus cembra dans les Alpes) ou ont vu leur population diminuer parce qu'il n'y avait plus assez de terrains disponibles dans lesquels elles puissent migrer. Le résultat le plus frappant a été le temps de latence dans la réponse de la plupart des espèces, indépendamment du scénario de changement climatique utilisé ou du type de limite des arbres. Finalement, un modèle statistique de l'effet de l'abroutissement par les rennes (Rangifer tarandus) sur la croissance de Pinus sylvestris a été développé, comme première étape en vue de l'implémentation des impacts humains sur la limite boréale des arbres. L'effet attendu était indirect, puisque les rennes réduisent la couverture de lichen sur le sol, dont on attend un effet protecteur contre les rigueurs climatiques. Le modèle a mis en évidence un effet modeste mais significatif, mais étant donné que le lien avec les variables climatiques sous jacentes était peu clair et que le modèle n'était pas appliqué dans l'espace, il n'était pas utilisable tel quel. Le développement du modèle TreeMig-LAb a permis : a) d'établir une méthode pour déduire les paramètres spécifiques de l'équation de croissance ä partir de données dendrochronologiques, b) de mettre en évidence l'importance de la régénération dans la position de la limite des arbres et la distribution des espèces et c) d'améliorer l'intégration des sciences sociales dans les modèles de paysage. L'application du modèle aux limites alpines et nord-européennes des arbres sous différents scénarios de changement climatique a montré qu'avec la plupart des niveaux d'augmentation de température prévus, la limite des arbres subirait des perturbations majeures, avec des glissements d'aires de répartition et l'extinction potentielle de certaines espèces. Cependant, ces réponses ont montré des temps de latence importants, si bien que ces effets ne seraient pas visibles avant des décennies et pourraient mettre plusieurs siècles à se stabiliser.

Modelling the influence of change in fire regime on the local distribution of a Mediterranean pyrophytic plant species (Cistus salviifolius) at its northern range limit

Aims: To assess the potential distribution of an obligate seeder and active pyrophyte, Cistus salviifolius, a vulnerable species in the Swiss Red List; to derive scenarios by changing the fire return interval; and to discuss the results from a conservation perspective. A more general aim is to assess the impact of fire as a natural factor influencing the vegetation of the southern slopes of the Alps. Locations: Alps, southern Switzerland. Methods: Presence-absence data to fit the model were obtained from the most recent field mapping of C. salviifolius. The quantitative environmental predictors used in this study include topographic, climatic and disturbance (fire) predictors. Models were fitted by logistic regression and evaluated by jackknife and bootstrap approaches. Changes in fire regime were simulated by increasing the time-return interval of fire (simulating longer periods without fire). Two scenarios were considered: no fire in the past 15 years; or in the past 35 years. Results: Rock cover, slope, topographic position, potential evapotranspiration and time elapsed since the last fire were selected in the final model. The Nagelkerke R-2 of the model for C. salviifolius was 0.57 and the Jackknife area under the curve evaluation was 0.89. The bootstrap evaluation revealed model robustness. By increasing the return interval of fire by either up to 15 years, or 35 years, the modelled C. salviifolius population declined by 30-40%, respectively. Main conclusions: Although fire plays a significant role, topography and rock cover appear to be the most important predictors, suggesting that the distribution of C. salviifolius in the southern Swiss Alps is closely related to the availability of supposedly competition-free sites, such as emerging bedrock, ridge locations or steep slopes. Fire is more likely to play a secondary role in allowing C. salviifolius to extend its occurrence temporarily, by increasing germination rates and reducing the competition from surrounding vegetation. To maintain a viable dormant seed bank for C. salviifolius, conservation managers should consider carrying out vegetation clearing and managing wild fire propagation to reduce competition and ensure sufficient recruitment for this species.