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.

In vitro engineering of human stratified urothelium: analysis of its morphology and function.

PURPOSE: Gastric or intestinal patches, commonly used for reconstructive cystoplasty, may induce severe metabolic complications. The use of bladder tissues reconstructed in vitro could avoid these complications. We compared cellular differentiation and permeability characteristics of human native with in vitro cultured stratified urothelium. MATERIALS AND METHODS: Human stratified urothelium was induced in vitro. Morphology was studied with light and electron microscopy and expression of key cellular proteins was assessed using immunohistochemistry. Permeability coefficients were determined by measuring water, urea, ammonia and proton fluxes across the urothelium. RESULTS: As in native urothelium the stratified urothelial construct consisted of basal membrane and basal, intermediate and superficial cell layers. The apical membrane of superficial cells formed villi and glycocalices, and tight junctions and desmosomes were developed. Immunohistochemistry showed similarities and differences in the expression of cytokeratins, integrin and cellular adhesion proteins. In the cultured urothelium cytokeratin 20 and integrin subunits alpha6 and beta4 were absent, and symplekin was expressed diffusely in all layers. Uroplakins were clearly expressed in the superficial umbrella cells of the urothelial constructs, however, they were also present in intermediate and basal cells. Symplekin and uroplakins were expressed only in the superficial cells of native bladder tissue. The urothelial constructs showed excellent viability, and functionally their permeabilities for water, urea and ammonia were no different from those measured in native human urothelium. Proton permeability was even lower in the constructs compared to that of native urothelium. CONCLUSIONS: Although the in vitro cultured human stratified urothelium did not show complete terminal differentiation of its superficial cells, it retained the same barrier characteristics against the principal urine components. These results indicate that such in vitro cultured urothelium, after being grown on a compliant degradable support or in coculture with smooth muscle cells, is suitable for reconstructive cystoplasty.

Translation of biomechanical concepts in bone tissue engineering: from animal study to revision knee arthroplasty.

Bone defects in revision knee arthroplasty are often located in load-bearing regions. The goal of this study was to determine whether a physiologic load could be used as an in situ osteogenic signal to the scaffolds filling the bone defects. In order to answer this question, we proposed a novel translation procedure having four steps: (1) determining the mechanical stimulus using finite element method, (2) designing an animal study to measure bone formation spatially and temporally using micro-CT imaging in the scaffold subjected to the estimated mechanical stimulus, (3) identifying bone formation parameters for the loaded and non-loaded cases appearing in a recently developed mathematical model for bone formation in the scaffold and (4) estimating the stiffness and the bone formation in the bone-scaffold construct. With this procedure, we estimated that after 3 years mechanical stimulation increases the bone volume fraction and the stiffness of scaffold by 1.5- and 2.7-fold, respectively, compared to a non-loaded situation.

Combining geophysical and laboratory measurements for civil Engineering.

The study of wave propagation at sonic frequency in soil leads to elasticity parameter determination. These parameters are compatible to those measured simultaneously by static loading. The acquisition of in situ elasticity parameter combined with laboratory description of the elastoplastic behaviour can lead to in situ elastoplastic curves. - L'étude de la propagation des ondes acoustiques permet la détermination des paramètres d'élasticité dans les sols. Ces paramètres sont cohérents avec des mesures statiques simultanées. L'acquisition des paramètres d'élasticité in situ associée à une description du comportement élasto-plastique mesuré en laboratoire permet d'obtenir des courbes d'élastoplasticité in situ.

Vom Finanz- zum Wissenschaftsbetrug : Methode, den Irrungen in der medizinischen Literatur beizukommen [From financial to scientific fraud : Methods to detect discrepancies in the medical literature].

Fraud is as old as Mankind. There are an enormous number of historical documents which show the interaction between truth and untruth; therefore it is not really surprising that the prevalence of publication discrepancies is increasing. More surprising is that new cases especially in the medical field generate such a huge astonishment. In financial mathematics a statistical tool for detection of fraud is known which uses the knowledge of Newcomb and Benford regarding the distribution of natural numbers. This distribution is not equal and lower numbers are more likely to be detected compared to higher ones. In this investigation all numbers contained in the blinded abstracts of the 2009 annual meeting of the Swiss Society of Anesthesia and Resuscitation (SGAR) were recorded and analyzed regarding the distribution. A manipulated abstract was also included in the investigation. The χ(2)-test was used to determine statistical differences between expected and observed counts of numbers. There was also a faked abstract integrated in the investigation. A p<0.05 was considered significant. The distribution of the 1,800 numbers in the 77 submitted abstracts followed Benford's law. The manipulated abstract was detected by statistical means (difference in expected versus observed p<0.05). Statistics cannot prove whether the content is true or not but can give some serious hints to look into the details in such conspicuous material. These are the first results of a test for the distribution of numbers presented in medical research.

Financial impact of introducing the Swiss-DRG reimbursement system on potentially avoidable readmissions at a university hospital.

QUESTION UNDER STUDY: Thirty-day readmissions can be classified as potentially avoidable (PARs) or not avoidable (NARs) by following a specific algorithm (SQLape®). We wanted to assess the financial impact of the Swiss-DRG system, which regroups some readmissions occurring within 18 days after discharge within the initial hospital stay, on PARs at our hospital. METHODS: First, PARs were identified from all hospitalisations recorded in 2011 at our university hospital. Second, 2012 Swiss-DRG readmission rules were applied, regrouped readmissions (RR) were identified, and their financial impact computed. Third, RRs were classified as potentially avoidable (PARRs), not avoidable (NARRs), and others causes (OCRRs). Characteristics of PARR patients and stays were retrieved, and the financial impact of PARRS was computed. RESULTS: A total of 36,777 hospitalisations were recorded in 2011, of which 3,140 were considered as readmissions (8.5%): 1,470 PARs (46.8%) and 1,733 NARs (53.2%). The 2012 Swiss-DRG rules would have resulted in 910 RRs (2.5% of hospitalisations, 29% of readmissions): 395 PARRs (43% of RR), 181 NARRs (20%), and 334 OCRRs (37%). Loss in reimbursement would have amounted to CHF 3.157 million (0.6% of total reimbursement). As many as 95% of the 395 PARR patients lived at home. In total, 28% of PARRs occurred within 3 days after discharge, and 58% lasted less than 5 days; 79% of the patients were discharged home again. Loss in reimbursement would amount to CHF 1.771 million. CONCLUSION: PARs represent a sizeable number of 30-day readmissions, as do PARRs of 18-day RRs in the 2012 Swiss DRG system. They should be the focus of attention, as the PARRs represent an avoidable loss in reimbursement.

Engineering, conjugation, and immunogenicity assessment of Escherichia coli O121 O antigen for its potential use as a typhoid vaccine component.

State-of-the-art production technologies for conjugate vaccines are complex, multi-step processes. An alternative approach to produce glycoconjugates is based on the bacterial N-linked protein glycosylation system first described in Campylobacter jejuni. The C. jejuni N-glycosylation system has been successfully transferred into Escherichia coli, enabling in vivo production of customized recombinant glycoproteins. However, some antigenic bacterial cell surface polysaccharides, like the Vi antigen of Salmonella enterica serovar Typhi, have not been reported to be accessible to the bacterial oligosaccharyltransferase PglB, hence hamper development of novel conjugate vaccines against typhoid fever. In this report, Vi-like polysaccharide structures that can be transferred by PglB were evaluated as typhoid vaccine components. A polysaccharide fulfilling these requirements was found in Escherichia coli serovar O121. Inactivation of the E. coli O121 O antigen cluster encoded gene wbqG resulted in expression of O polysaccharides reactive with antibodies raised against the Vi antigen. The structure of the recombinantly expressed mutant O polysaccharide was elucidated using a novel HPLC and mass spectrometry based method for purified undecaprenyl pyrophosphate (Und-PP) linked glycans, and the presence of epitopes also found in the Vi antigen was confirmed. The mutant O antigen structure was transferred to acceptor proteins using the bacterial N-glycosylation system, and immunogenicity of the resulting conjugates was evaluated in mice. The conjugate-induced antibodies reacted in an enzyme-linked immunosorbent assay with E. coli O121 LPS. One animal developed a significant rise in serum immunoglobulin anti-Vi titer upon immunization.

Can Families Resist Managerial and Financial Revolutions? Swiss Family Firms in the Twentieth Century

The aim of this contribution is to highlight the long-term evolution of family capitalism in Switzerland during the twentieth century. We focus on 22 large companies of the machine, electrotechnical and metallurgy (MEM) sector whose boards of directors and general managers have been identified in five benchmark years across the twentieth century, which allows us to distinguish between family-owned and family-controlled firms. Our results show that family firms prevailed until the 1980s and thus contradict the dominance of 'managerial capitalism'. Although we observe a decline of family capitalism during the last decade of the century, the significant remaining presence of family firms in 2000 allows us to relativise the advent of investor capitalism.