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.

Direct binding of peptides to MHC class I molecules on living cells. Analysis at the single cell level.

To directly assess the binding of exogenous peptides to cell surface-associated MHC class I molecules at the single cell level, we examined the possibility of combining the use of biotinylated peptide derivatives with an immunofluorescence detection system based on flow cytometry. Various biotinylated derivatives of the adenovirus 5 early region 1A peptide 234-243, an antigenic peptide recognized by CTL in the context of H-2Db, were first screened in functional assays for their ability to bind efficiently to Db molecules on living cells. Suitable peptide derivatives were then tested for their ability to generate positive fluorescence signals upon addition of phycoerythrin-labeled streptavidin to peptide derivative-bearing cells. Strong fluorescent staining of Db-expressing cells was achieved after incubation with a peptide derivative containing a biotin group at the C-terminus. Competition experiments using the unmodified parental peptide as well as unrelated peptides known to bind to Kd, Kb, or Db, respectively, established that binding of the biotinylated peptide to living cells was Db-specific. By using Con A blasts derived from different H-2 congenic mouse strains, it could be shown that the biotinylated peptide bound only to Db among > 20 class I alleles tested. Moreover, binding of the biotinylated peptide to cells expressing the Dbm13 and Dbm14 mutant molecules was drastically reduced compared to Db. Binding of the biotinylated peptide to freshly isolated Db+ cells was readily detectable, allowing direct assessment of the relative amount of peptide bound to distinct lymphocyte subpopulations by three-color flow cytometry. While minor differences between peripheral T and B cells could be documented, thymocytes were found to differ widely in their peptide binding activity. In all cases, these differences correlated positively with the differential expression of Db at the cell surface. Finally, kinetic studies at different temperatures strongly suggested that the biotinylated peptide first associated with Db molecules available constitutively at the cell surface and then with newly arrived Db molecules.

Renal responses to three types of renin-angiotensin system blockers in patients with diabetes mellitus on a high-salt diet: a need for higher doses in diabetic patients?

Objective Activation of the renal renin-angiotensin system in patients with diabetes mellitus appears to contribute to the risk of nephropathy. Recently, it has been recognized than an elevation of prorenin in plasma also provides a strong indication of risk of nephropathy. This study was designed to examine renin-angiotensin system control mechanisms in the patient with diabetes mellitus.Methods We enrolled 43 individuals with type 2 diabetes mellitus. All individuals were on a high-salt diet to minimize the contribution of the systemic renin-angiotensin system. After an acute exposure to captopril (25 mg), they were randomized to treatment with either irbesartan (300 mg) or aliskiren (300 mg) for 2 weeks.Results All agents acutely lowered blood pressure and plasma aldosterone, and increased renal plasma flow and glomerular filtration rate. Yet, only captopril and aliskiren acutely increased plasma renin and decreased plasma angiotensin II, whereas irbesartan acutely affected neither renin nor angiotensin II. Plasma renin and angiotensin II subsequently did increase upon chronic irbesartan treatment. When given on day 14, irbesartan and aliskiren again induced the above hemodynamic, renal and adrenal effects, yet without significantly changing plasma renin. Irbesartan at that time did not affect plasma angiotensin II, whereas aliskiren lowered it to almost zero.Conclusion The relative resistance of the renal renin response to acute (irbesartan) and chronic (irbesartan and aliskiren) renin-angiotensin system blockade supports the concept of an activated renal renin-angiotensin system in diabetes, particularly at the level of the juxtaglomerular cell, and implies that diabetic patients might require higher doses of renin-angiotensin system blockers to fully suppress the renal renin-angiotensin system. J Hypertens 29: 2454-2461 (C) 2011 Wolters Kluwer Health vertical bar Lippincott Williams & Wilkins.