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.

Orthogonal higher order structure and confirmatory factor analysis of the French Wechsler Adult Intelligence Scale (WAIS-III).

According to the most widely accepted Cattell-Horn-Carroll (CHC) model of intelligence measurement, each subtest score of the Wechsler Intelligence Scale for Adults (3rd ed.; WAIS-III) should reflect both 1st- and 2nd-order factors (i.e., 4 or 5 broad abilities and 1 general factor). To disentangle the contribution of each factor, we applied a Schmid-Leiman orthogonalization transformation (SLT) to the standardization data published in the French technical manual for the WAIS-III. Results showed that the general factor accounted for 63% of the common variance and that the specific contributions of the 1st-order factors were weak (4.7%-15.9%). We also addressed this issue by using confirmatory factor analysis. Results indicated that the bifactor model (with 1st-order group and general factors) better fit the data than did the traditional higher order structure. Models based on the CHC framework were also tested. Results indicated that a higher order CHC model showed a better fit than did the classical 4-factor model; however, the WAIS bifactor structure was the most adequate. We recommend that users do not discount the Full Scale IQ when interpreting the index scores of the WAIS-III because the general factor accounts for the bulk of the common variance in the French WAIS-III. The 4 index scores cannot be considered to reflect only broad ability because they include a strong contribution of the general factor.

Initiation and limitation of Ly-49A NK cell receptor acquisition by T cell factor-1.

The establishment of clonally variable expression of MHC class I-specific receptors by NK cells is not well understood. The Ly-49A receptor is used by approximately 20% of NK cells, whereby most cells express either the maternal or paternal allele and few express simultaneously both alleles. We have previously shown that NK cells expressing Ly-49A were reduced or almost absent in mice harboring a single or no functional allele of the transcription factor T cell factor-1 (TCF-1), respectively. In this study, we show that enforced expression of TCF-1 in transgenic mice yields an expanded Ly-49A subset. Even though the frequencies of Ly-49A(+) NK cells varied as a function of the TCF-1 dosage, the relative abundance of mono- and biallelic Ly-49A cells was maintained. Mono- and biallelic Ly-49A NK cells were also observed in mice expressing exclusively a transgenic TCF-1, i.e., expressing a fixed amount of TCF-1 in all NK cells. These findings suggest that Ly-49A acquisition is a stochastic event due to limiting TCF-1 availability, rather than the consequence of clonally variable expression of the endogenous TCF-1 locus. Efficient Ly-49A acquisition depended on the expression of a TCF-1 isoform, which included a domain known to associate with the TCF-1 coactivator beta-catenin. Indeed, the proximal Ly-49A promoter was beta-catenin responsive in reporter gene assays. We thus propose that Ly-49A receptor expression is induced from a single allele in occasional NK cells due to a limitation in the amount of a transcription factor complex requiring TCF-1.

Nuclear factor I-C links platelet-derived growth factor and transforming growth factor beta1 signaling to skin wound healing progression.

Transforming growth factor beta (TGF-beta) and platelet-derived growth factor A (PDGFAlpha) play a central role in tissue morphogenesis and repair, but their interplay remain poorly understood. The nuclear factor I C (NFI-C) transcription factor has been implicated in TGF-beta signaling, extracellular matrix deposition, and skin appendage pathologies, but a potential role in skin morphogenesis or healing had not been assessed. To evaluate this possibility, we performed a global gene expression analysis in NFI-C(-/-) and wild-type embryonic primary murine fibroblasts. This indicated that NFI-C acts mostly to repress gene expression in response to TGF-beta1. Misregulated genes were prominently overrepresented by regulators of connective tissue inflammation and repair. In vivo skin healing revealed a faster inflammatory stage and wound closure in NFI-C(-/-) mice. Expression of PDGFA and PDGF-receptor alpha were increased in wounds of NFI-C(-/-) mice, explaining the early recruitment of macrophages and fibroblasts. Differentiation of fibroblasts to contractile myofibroblasts was also elevated, providing a rationale for faster wound closure. Taken together with the role of TGF-beta in myofibroblast differentiation, our results imply a central role of NFI-C in the interplay of the two signaling pathways and in regulation of the progression of tissue regeneration.

Insulin secretion is regulated by the glucose-dependent production of islet beta cell macrophage migration inhibitory factor.

Macrophage migration inhibitory factor (MIF), originally identified as a cytokine secreted by T lymphocytes, was found recently to be both a pituitary hormone and a mediator released by immune cells in response to glucocorticoid stimulation. We report here that the insulin-secreting beta cell of the islets of Langerhans expresses MIF and that its production is regulated by glucose in a time- and concentration-dependent manner. MIF and insulin colocalize by immunocytochemistry within the secretory granules of the pancreatic islet beta cells, and once released, MIF appears to regulate insulin release in an autocrine fashion. In perifusion studies performed with isolated rat islets, immunoneutralization of MIF reduced the first and second phase of the glucose-induced insulin secretion response by 39% and 31%, respectively. Conversely, exogenously added recombinant MIF was found to potentiate insulin release. Constitutive expression of MIF antisense RNA in the insulin-secreting INS-1 cell line inhibited MIF protein synthesis and decreased significantly glucose-induced insulin release. MIF is therefore a glucose-dependent, islet cell product that regulates insulin secretion in a positive manner and may play an important role in carbohydrate metabolism.

Epidermal growth factor receptor: a re-emerging target in glioblastoma.

PURPOSE OF REVIEW: Amplification and overexpression of the epidermal growth factor receptor (EGFR) gene are a hallmark of primary glioblastoma (45%), making it a prime target for therapy. In addition, these amplifications are frequently associated with oncogenic mutations in the extracellular domain. However, efforts at targeting the EGFR tyrosine kinase using small molecule inhibitors or antibodies have shown disappointing efficacy in clinical trials for newly diagnosed or recurrent glioblastoma. Here, we review recent insights into molecular mechanisms relevant for effective targeting of the EGFR pathway. RECENT FINDINGS: Molecular workup of glioblastoma tissue of patients under treatment with small molecule inhibitors has established drug concentrations in the tumor tissue, and has shed light on the effectiveness of target inhibition and respective effects on pathway signaling. Further, functional analyses of interaction of small molecule inhibitors with distinct properties to bind to the active or inactive form of EGFR have provided new insights that will impact the choice of drugs. Finally, vaccination approaches targeting the EGFRvIII mutant featuring a tumor-specific antigen have shown promising results that warrant larger controlled clinical trials. SUMMARY: A combination of preclinical and clinical studies at the molecular level has provided new insights that will allow refining strategies for targeting the EGFR pathway in glioblastoma.

Expression of Staphylococcus aureus clumping factor A in Lactococcus lactis subsp. cremoris using a new shuttle vector.

Staphylococcus aureus harbors redundant adhesins mediating tissue colonization and infection. To evaluate their intrinsic role outside of the staphylococcal background, a system was designed to express them in Lactococcus lactis subsp. cremoris 1363. This bacterium is devoid of virulence factors and has a known genetic background. A new Escherichia coli-L. lactis shuttle and expression vector was constructed for this purpose. First, the high-copy-number lactococcal plasmid pIL253 was equipped with the oriColE1 origin, generating pOri253 that could replicate in E. coli. Second, the lactococcal promoters P23 or P59 were inserted at one end of the pOri253 multicloning site. Gene expression was assessed by a luciferase reporter system. The plasmid carrying P23 (named pOri23) expressed luciferase constitutively at a level 10,000 times greater than did the P59-containing plasmid. Transcription was absent in E. coli. The staphylococcal clumping factor A (clfA) gene was cloned into pOri23 and used as a model system. Lactococci carrying pOri23-clfA produced an unaltered and functional 130-kDa ClfA protein attached to their cell walls. This was indicated both by the presence of the protein in Western blots of solubilized cell walls and by the ability of ClfA-positive lactococci to clump in the presence of plasma. ClfA-positive lactococci had clumping titers (titer of 4,112) similar to those of S. aureus Newman in soluble fibrinogen and bound equally well to solid-phase fibrinogen. These experiments provide a new way to study individual staphylococcal pathogenic factors and might complement both classical knockout mutagenesis and modern in vivo expression technology and signature tag mutagenesis.

Flagellin promotes myeloid differentiation factor 88-dependent development of Th2-type response.

Activation of dendritic cells (DC) by microbial products via Toll-like receptors (TLR) is instrumental in the induction of immunity. In particular, TLR signaling plays a major role in the instruction of Th1 responses. The development of Th2 responses has been proposed to be independent of the adapter molecule myeloid differentiation factor 88 (MyD88) involved in signal transduction by TLRs. In this study we show that flagellin, the bacterial stimulus for TLR5, drives MyD88-dependent Th2-type immunity in mice. Flagellin promotes the secretion of IL-4 and IL-13 by Ag-specific CD4(+) T cells as well as IgG1 responses. The Th2-biased responses are associated with the maturation of DCs, which are shown to express TLR5. Flagellin-mediated DC activation requires MyD88 and induces NF-kappaB-dependent transcription and the production of low levels of proinflammatory cytokines. In addition, the flagellin-specific response is characterized by the lack of secretion of the Th1-promoting cytokine IL-12 p70. In conclusion, this study suggests that flagellin and, more generally, TLR ligands can control Th2 responses in a MyD88-dependent manner.

Wound infection after excision and primary midline closure for pilonidal disease: risk factor analysis to improve patient selection.

BACKGROUND: Excision and primary midline closure for pilonidal disease (PD) is a simple procedure; however, it is frequently complicated by infection and prolonged healing. The aim of this study was to analyze risk factors for surgical site infection (SSI) in this context. METHODS: All consecutive patients undergoing excision and primary closure for PD from January 2002 through October 2008 were retrospectively assessed. The end points were SSI, as defined by the Center for Disease Control, and time to healing. Univariable and multivariable risk factor analyses were performed. RESULTS: One hundred thirty-one patients were included [97 men (74%), median age = 24 (range 15-66) years]. SSI occurred in 41 (31%) patients. Median time to healing was 20 days (range 12-76) in patients without SSI and 62 days (range 20-176) in patients with SSI (P < 0.0001). In univariable and multivariable analyses, smoking [OR = 2.6 (95% CI 1.02, 6.8), P = 0.046] and lack of antibiotic prophylaxis [OR = 5.6 (95% CI 2.5, 14.3), P = 0.001] were significant predictors for SSI. Adjusted for SSI, age over 25 was a significant predictor of prolonged healing. CONCLUSION: This study suggests that the rate of SSI after excision and primary closure of PD is higher in smokers and could be reduced by antibiotic prophylaxis. SSI significantly prolongs healing time, particularly in patients over 25 years.

Brain-derived neurotrophic factor enhances the hippocampal expression of key postsynaptic proteins in vivo including the monocarboxylate transporter MCT2.

Brain-derived neurotrophic factor (BDNF) promotes synaptic plasticity via an enhancement in expression of specific synaptic proteins. Recent results suggest that the neuronal monocarboxylate transporter MCT2 is a postsynaptic protein critically involved in synaptic plasticity and long-term memory. To investigate in vivo whether BDNF can modulate the expression of MCT2 as well as other proteins involved in synaptic plasticity, acute injection of BDNF was performed in mouse dorsal hippocampal CA1 area. Using immunohistochemistry, it was found that MCT2 expression was enhanced in part of the CA1 area and in the dentate gyrus 6 h after a single intrahippocampal injection of BDNF. Similarly, expression of the immediate early genes Arc and Zif268 was enhanced in the same hippocampal areas, in accordance with their role in synaptic plasticity. Immunoblot analysis confirmed the significant enhancement in MCT2 protein expression. In contrast, no changes were observed for the glial monocarboxylate transporters MCT1 and MCT4. When other synaptic proteins were investigated, it was found that postsynaptic density 95 (PSD95) and glutamate receptor 2 (GluR2) protein levels were significantly enhanced while no effect could be detected for synaptophysin, synaptosomal-associated protein 25 (SNAP25), αCaMKII and GluR1. These results demonstrate that MCT2 expression can be upregulated together with other key postsynaptic proteins in vivo under conditions related to synaptic plasticity, further suggesting the importance of energetics for memory formation.

Tumor necrosis factor (TNF) signaling, but not TWEAK (TNF-like weak inducer of apoptosis)-triggered cIAP1 (cellular inhibitor of apoptosis protein 1) degradation, requires cIAP1 RING dimerization and E2 binding.

Cellular inhibitor of apoptosis (cIAP) proteins, cIAP1 and cIAP2, are important regulators of tumor necrosis factor (TNF) superfamily (SF) signaling and are amplified in a number of tumor types. They are targeted by IAP antagonist compounds that are undergoing clinical trials. IAP antagonist compounds trigger cIAP autoubiquitylation and degradation. The TNFSF member TWEAK induces lysosomal degradation of TRAF2 and cIAPs, leading to elevated NIK levels and activation of non-canonical NF-kappaB. To investigate the role of the ubiquitin ligase RING domain of cIAP1 in these pathways, we used cIAP-deleted cells reconstituted with cIAP1 point mutants designed to interfere with the ability of the RING to dimerize or to interact with E2 enzymes. We show that RING dimerization and E2 binding are required for IAP antagonists to induce cIAP1 degradation and protect cells from TNF-induced cell death. The RING functions of cIAP1 are required for full TNF-induced activation of NF-kappaB, however, delayed activation of NF-kappaB still occurs in cIAP1 and -2 double knock-out cells. The RING functions of cIAP1 are also required to prevent constitutive activation of non-canonical NF-kappaB by targeting NIK for proteasomal degradation. However, in cIAP double knock-out cells TWEAK was still able to increase NIK levels demonstrating that NIK can be regulated by cIAP-independent pathways. Finally we show that, unlike IAP antagonists, TWEAK was able to induce degradation of cIAP1 RING mutants. These results emphasize the critical importance of the RING of cIAP1 in many signaling scenarios, but also demonstrate that in some pathways RING functions are not required.