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.

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.

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 higher moment asset pricing and liquidity risk

This thesis focuses on theoretical asset pricing models and their empirical applications. I aim to investigate the following noteworthy problems: i) if the relationship between asset prices and investors' propensities to gamble and to fear disaster is time varying, ii) if the conflicting evidence for the firm and market level skewness can be explained by downside risk, Hi) if costly learning drives liquidity risk. Moreover, empirical tests support the above assumptions and provide novel findings in asset pricing, investment decisions, and firms' funding liquidity. The first chapter considers a partial equilibrium model where investors have heterogeneous propensities to gamble and fear disaster. Skewness preference represents the desire to gamble, while kurtosis aversion represents fear of extreme returns. Using US data from 1988 to 2012, my model demonstrates that in bad times, risk aversion is higher, more people fear disaster, and fewer people gamble, in contrast to good times. This leads to a new empirical finding: gambling preference has a greater impact on asset prices during market downturns than during booms. The second chapter consists of two essays. The first essay introduces a foramula based on conditional CAPM for decomposing the market skewness. We find that the major market upward and downward movements can be well preadicted by the asymmetric comovement of betas, which is characterized by an indicator called "Systematic Downside Risk" (SDR). We find that SDR can efafectively forecast future stock market movements and we obtain out-of-sample R-squares (compared with a strategy using historical mean) of more than 2.27% with monthly data. The second essay reconciles a well-known empirical fact: aggregating positively skewed firm returns leads to negatively skewed market return. We reconcile this fact through firms' greater response to negative maraket news than positive market news. We also propose several market return predictors, such as downside idiosyncratic skewness. The third chapter studies the funding liquidity risk based on a general equialibrium model which features two agents: one entrepreneur and one external investor. Only the investor needs to acquire information to estimate the unobservable fundamentals driving the economic outputs. The novelty is that information acquisition is more costly in bad times than in good times, i.e. counter-cyclical information cost, as supported by previous empirical evidence. Later we show that liquidity risks are principally driven by costly learning. Résumé Cette thèse présente des modèles théoriques dévaluation des actifs et leurs applications empiriques. Mon objectif est d'étudier les problèmes suivants: la relation entre l'évaluation des actifs et les tendances des investisseurs à parier et à crainadre le désastre varie selon le temps ; les indications contraires pour l'entreprise et l'asymétrie des niveaux de marché peuvent être expliquées par les risques de perte en cas de baisse; l'apprentissage coûteux augmente le risque de liquidité. En outre, des tests empiriques confirment les suppositions ci-dessus et fournissent de nouvelles découvertes en ce qui concerne l'évaluation des actifs, les décisions relatives aux investissements et la liquidité de financement des entreprises. Le premier chapitre examine un modèle d'équilibre où les investisseurs ont des tendances hétérogènes à parier et à craindre le désastre. La préférence asymétrique représente le désir de parier, alors que le kurtosis d'aversion représente la crainte du désastre. En utilisant les données des Etats-Unis de 1988 à 2012, mon modèle démontre que dans les mauvaises périodes, l'aversion du risque est plus grande, plus de gens craignent le désastre et moins de gens parient, conatrairement aux bonnes périodes. Ceci mène à une nouvelle découverte empirique: la préférence relative au pari a un plus grand impact sur les évaluations des actifs durant les ralentissements de marché que durant les booms économiques. Exploitant uniquement cette relation générera un revenu excédentaire annuel de 7,74% qui n'est pas expliqué par les modèles factoriels populaires. Le second chapitre comprend deux essais. Le premier essai introduit une foramule base sur le CAPM conditionnel pour décomposer l'asymétrie du marché. Nous avons découvert que les mouvements de hausses et de baisses majeures du marché peuvent être prédits par les mouvements communs des bêtas. Un inadicateur appelé Systematic Downside Risk, SDR (risque de ralentissement systématique) est créé pour caractériser cette asymétrie dans les mouvements communs des bêtas. Nous avons découvert que le risque de ralentissement systématique peut prévoir les prochains mouvements des marchés boursiers de manière efficace, et nous obtenons des carrés R hors échantillon (comparés avec une stratégie utilisant des moyens historiques) de plus de 2,272% avec des données mensuelles. Un investisseur qui évalue le marché en utilisant le risque de ralentissement systématique aurait obtenu une forte hausse du ratio de 0,206. Le second essai fait cadrer un fait empirique bien connu dans l'asymétrie des niveaux de march et d'entreprise, le total des revenus des entreprises positiveament asymétriques conduit à un revenu de marché négativement asymétrique. Nous décomposons l'asymétrie des revenus du marché au niveau de l'entreprise et faisons cadrer ce fait par une plus grande réaction des entreprises aux nouvelles négatives du marché qu'aux nouvelles positives du marché. Cette décomposition révélé plusieurs variables de revenus de marché efficaces tels que l'asymétrie caractéristique pondérée par la volatilité ainsi que l'asymétrie caractéristique de ralentissement. Le troisième chapitre fournit une nouvelle base théorique pour les problèmes de liquidité qui varient selon le temps au sein d'un environnement de marché incomplet. Nous proposons un modèle d'équilibre général avec deux agents: un entrepreneur et un investisseur externe. Seul l'investisseur a besoin de connaitre le véritable état de l'entreprise, par conséquent, les informations de paiement coutent de l'argent. La nouveauté est que l'acquisition de l'information coute plus cher durant les mauvaises périodes que durant les bonnes périodes, comme cela a été confirmé par de précédentes expériences. Lorsque la récession comamence, l'apprentissage coûteux fait augmenter les primes de liquidité causant un problème d'évaporation de liquidité, comme cela a été aussi confirmé par de précédentes expériences.

Improving generalized regression analysis for the spatial prediction of forest communities

Aim This study used data from temperate forest communities to assess: (1) five different stepwise selection methods with generalized additive models, (2) the effect of weighting absences to ensure a prevalence of 0.5, (3) the effect of limiting absences beyond the environmental envelope defined by presences, (4) four different methods for incorporating spatial autocorrelation, and (5) the effect of integrating an interaction factor defined by a regression tree on the residuals of an initial environmental model. Location State of Vaud, western Switzerland. Methods Generalized additive models (GAMs) were fitted using the grasp package (generalized regression analysis and spatial predictions, http://www.cscf.ch/grasp). Results Model selection based on cross-validation appeared to be the best compromise between model stability and performance (parsimony) among the five methods tested. Weighting absences returned models that perform better than models fitted with the original sample prevalence. This appeared to be mainly due to the impact of very low prevalence values on evaluation statistics. Removing zeroes beyond the range of presences on main environmental gradients changed the set of selected predictors, and potentially their response curve shape. Moreover, removing zeroes slightly improved model performance and stability when compared with the baseline model on the same data set. Incorporating a spatial trend predictor improved model performance and stability significantly. Even better models were obtained when including local spatial autocorrelation. A novel approach to include interactions proved to be an efficient way to account for interactions between all predictors at once. Main conclusions Models and spatial predictions of 18 forest communities were significantly improved by using either: (1) cross-validation as a model selection method, (2) weighted absences, (3) limited absences, (4) predictors accounting for spatial autocorrelation, or (5) a factor variable accounting for interactions between all predictors. The final choice of model strategy should depend on the nature of the available data and the specific study aims. Statistical evaluation is useful in searching for the best modelling practice. However, one should not neglect to consider the shapes and interpretability of response curves, as well as the resulting spatial predictions in the final assessment.

A dynamic model for stem cell homeostasis and patterning in Arabidopsis meristems.

Plants maintain stem cells in their meristems as a source for new undifferentiated cells throughout their life. Meristems are small groups of cells that provide the microenvironment that allows stem cells to prosper. Homeostasis of a stem cell domain within a growing meristem is achieved by signalling between stem cells and surrounding cells. We have here simulated the origin and maintenance of a defined stem cell domain at the tip of Arabidopsis shoot meristems, based on the assumption that meristems are self-organizing systems. The model comprises two coupled feedback regulated genetic systems that control stem cell behaviour. Using a minimal set of spatial parameters, the mathematical model allows to predict the generation, shape and size of the stem cell domain, and the underlying organizing centre. We use the model to explore the parameter space that allows stem cell maintenance, and to simulate the consequences of mutations, gene misexpression and cell ablations.

Do habitat suitability models reliably predict the recovery areas of threatened species?

1. Identifying those areas suitable for recolonization by threatened species is essential to support efficient conservation policies. Habitat suitability models (HSM) predict species' potential distributions, but the quality of their predictions should be carefully assessed when the species-environment equilibrium assumption is violated.2. We studied the Eurasian otter Lutra lutra, whose numbers are recovering in southern Italy. To produce widely applicable results, we chose standard HSM procedures and looked for the models' capacities in predicting the suitability of a recolonization area. We used two fieldwork datasets: presence-only data, used in the Ecological Niche Factor Analyses (ENFA), and presence-absence data, used in a Generalized Linear Model (GLM). In addition to cross-validation, we independently evaluated the models with data from a recolonization event, providing presences on a previously unoccupied river.3. Three of the models successfully predicted the suitability of the recolonization area, but the GLM built with data before the recolonization disagreed with these predictions, missing the recolonized river's suitability and badly describing the otter's niche. Our results highlighted three points of relevance to modelling practices: (1) absences may prevent the models from correctly identifying areas suitable for a species spread; (2) the selection of variables may lead to randomness in the predictions; and (3) the Area Under Curve (AUC), a commonly used validation index, was not well suited to the evaluation of model quality, whereas the Boyce Index (CBI), based on presence data only, better highlighted the models' fit to the recolonization observations.4. For species with unstable spatial distributions, presence-only models may work better than presence-absence methods in making reliable predictions of suitable areas for expansion. An iterative modelling process, using new occurrences from each step of the species spread, may also help in progressively reducing errors.5. Synthesis and applications. Conservation plans depend on reliable models of the species' suitable habitats. In non-equilibrium situations, such as the case for threatened or invasive species, models could be affected negatively by the inclusion of absence data when predicting the areas of potential expansion. Presence-only methods will here provide a better basis for productive conservation management practices.

Sex differences in urinary levels of several biological indicators of exposure: a simulation study using a compartmental based toxicokinetic model

Toxicokinetic modeling is a useful tool to describe or predict the behavior of a chemical agent in the human or animal organism. A general model based on four compartments was developed in a previous study in order to quantify the effect of human variability on a wide range of biological exposure indicators. The aim of this study was to adapt this existing general toxicokinetic model to three organic solvents, which were methyl ethyl ketone, 1-methoxy-2-propanol and 1,1,1,-trichloroethane, and to take into account sex differences. We assessed in a previous human volunteer study the impact of sex on different biomarkers of exposure corresponding to the three organic solvents mentioned above. Results from that study suggested that not only physiological differences between men and women but also differences due to sex hormones levels could influence the toxicokinetics of the solvents. In fact the use of hormonal contraceptive had an effect on the urinary levels of several biomarkers, suggesting that exogenous sex hormones could influence CYP2E1 enzyme activity. These experimental data were used to calibrate the toxicokinetic models developed in this study. Our results showed that it was possible to use an existing general toxicokinetic model for other compounds. In fact, most of the simulation results showed good agreement with the experimental data obtained for the studied solvents, with a percentage of model predictions that lies within the 95% confidence interval varying from 44.4 to 90%. Results pointed out that for same exposure conditions, men and women can show important differences in urinary levels of biological indicators of exposure. Moreover, when running the models by simulating industrial working conditions, these differences could even be more pronounced. In conclusion, a general and simple toxicokinetic model, adapted for three well known organic solvents, allowed us to show that metabolic parameters can have an important impact on the urinary levels of the corresponding biomarkers. These observations give evidence of an interindividual variablity, an aspect that should have its place in the approaches for setting limits of occupational exposure.

Reproducibility and within-day variability of body fat masurements using segmental bipolar bioelectrical impedance in women

Objective: to assess the between and within-device reproducibility, as well as within-day variability of body fat measurements. Methods: body fat percentage (%BF) was measured twice on seventeen female students aged between 18 and 20 with a body mass index of 21.9 22.6 kg/m2 (mean SD) using seven bipolar bioelectrical impedance devices (BF-306) according to the manufacturer's recommendations. Each student was also measured each hour between 7:00 and 22:00. Statistical analysis was conducted using a general linear model for repeated measurements. Results: the correlation between first and second measurements was very high (Pearson r between 0.985 and 1.000, p<0.001), as well as the correlation between devices (Pearson r between 0.986 and 0.999, all p<0.001). Repeated measurements analysis showed no differences were between devices (F test=0.83, p=0.59) or readings (first vs. second: F test=0.12, p=0.74). Conversely, significant differences were found between assessment periods throughout the day, measurements made in the morning being lower than those made in the afternoon. Assuming an overall daily average of 100 (based on all measurements), the values were 95.8 3.2 (mean SD) at 8:00 versus 101.3 3.0 at 20:00, corresponding to a mean change of 2.2 1.1 in %BF (F test for repeated values=6.58, p<0.001). Conclusions: the between and within-device reproducibility for measuring body fat is high, enabling the use of multiple devices in a single study. Conversely, small but significant changes in body fat measurements occur during the day, urging body fat measurements to be performed at fixed times.

Interregional compensatory mechanisms of motor functioning in progressing preclinical neurodegeneration.

Understanding brain reserve in preclinical stages of neurodegenerative disorders allows determination of which brain regions contribute to normal functioning despite accelerated neuronal loss. Besides the recruitment of additional regions, a reorganisation and shift of relevance between normally engaged regions are a suggested key mechanism. Thus, network analysis methods seem critical for investigation of changes in directed causal interactions between such candidate brain regions. To identify core compensatory regions, fifteen preclinical patients carrying the genetic mutation leading to Huntington's disease and twelve controls underwent fMRI scanning. They accomplished an auditory paced finger sequence tapping task, which challenged cognitive as well as executive aspects of motor functioning by varying speed and complexity of movements. To investigate causal interactions among brain regions a single Dynamic Causal Model (DCM) was constructed and fitted to the data from each subject. The DCM parameters were analysed using statistical methods to assess group differences in connectivity, and the relationship between connectivity patterns and predicted years to clinical onset was assessed in gene carriers. In preclinical patients, we found indications for neural reserve mechanisms predominantly driven by bilateral dorsal premotor cortex, which increasingly activated superior parietal cortices the closer individuals were to estimated clinical onset. This compensatory mechanism was restricted to complex movements characterised by high cognitive demand. Additionally, we identified task-induced connectivity changes in both groups of subjects towards pre- and caudal supplementary motor areas, which were linked to either faster or more complex task conditions. Interestingly, coupling of dorsal premotor cortex and supplementary motor area was more negative in controls compared to gene mutation carriers. Furthermore, changes in the connectivity pattern of gene carriers allowed prediction of the years to estimated disease onset in individuals. Our study characterises the connectivity pattern of core cortical regions maintaining motor function in relation to varying task demand. We identified connections of bilateral dorsal premotor cortex as critical for compensation as well as task-dependent recruitment of pre- and caudal supplementary motor area. The latter finding nicely mirrors a previously published general linear model-based analysis of the same data. Such knowledge about disease specific inter-regional effective connectivity may help identify foci for interventions based on transcranial magnetic stimulation designed to stimulate functioning and also to predict their impact on other regions in motor-associated networks.

Proximal tibia volumetric bone mineral density is correlated to the magnitude of local acceleration in male long distance runners.

Introduction: The beneficial effect of physical exercise on bone mineral density (BMD) is at least partly explained by the forces exerted directly on the bones. Male runners present generally higher BMD than sedentary individuals. We postulated that the proximal tibia BMD is related to the running distance as well as to the magnitude of the shocks (while running) in male runners. Methods: A prospective study (three yearly measurements) included 81 healthy male subjects: 16 sedentary lean subjects and three groups of runners (5-30 km/week, n=19; 30-50 km/week, n=29; 50-100 km/week, n=17). Several measurements were performed at the proximal tibia level: volumetric BMD (vBMD), cortical index (CI) i.e. an index of cortical bone thickness and peak accelerations (an index of shocks during heel strike) while running (measured by a 3-D accelerometer). A general linear model assessed the prediction of vBMD or CI by a) simple effects (running distance, peak accelerations, time) and b) interactions (for instance if vBMD prediction by peak acceleration depends on running distance). Results: CI and vBMD a) increase with running distance to reach a plateau over 30 km/wk, b) are positively associated with peak accelerations over 30 km/week. Discussion: Running may be associated with high peak accelerations in order to have beneficial effects on BMD. More important strains are needed to be associated with the same increase in BMD during running sessions of short duration than those of long duration. Conclusion: CI and vBMD are associated with the magnitude of the shocks during heel strike in runners. Key words: Bone mineral density, strains, physical exercise, running distance.