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.

New perspectives in the use of ink evidence in forensic science: Part I. Development of a quality assurance process for forensic ink analysis by HPTLC

The level of information provided by ink evidence to the criminal and civil justice system is limited. The limitations arise from the weakness of the interpretative framework currently used, as proposed in the ASTM 1422-05 and 1789-04 on ink analysis. It is proposed to use the likelihood ratio from the Bayes theorem to interpret ink evidence. Unfortunately, when considering the analytical practices, as defined in the ASTM standards on ink analysis, it appears that current ink analytical practices do not allow for the level of reproducibility and accuracy required by a probabilistic framework. Such framework relies on the evaluation of the statistics of the ink characteristics using an ink reference database and the objective measurement of similarities between ink samples. A complete research programme was designed to (a) develop a standard methodology for analysing ink samples in a more reproducible way, (b) comparing automatically and objectively ink samples and (c) evaluate the proposed methodology in a forensic context. This report focuses on the first of the three stages. A calibration process, based on a standard dye ladder, is proposed to improve the reproducibility of ink analysis by HPTLC, when these inks are analysed at different times and/or by different examiners. The impact of this process on the variability between the repetitive analyses of ink samples in various conditions is studied. The results show significant improvements in the reproducibility of ink analysis compared to traditional calibration methods.

MRI-based assessment of the pineal gland in a large population of children aged 0-5 years and comparison with pineoblastoma: part I, the solid gland.

INTRODUCTION: Differentiation between normal solid (non-cystic) pineal glands and pineal pathologies on brain MRI is difficult. The aim of this study was to assess the size of the solid pineal gland in children (0-5 years) and compare the findings with published pineoblastoma cases. METHODS: We retrospectively analyzed the size (width, height, planimetric area) of solid pineal glands in 184 non-retinoblastoma patients (73 female, 111 male) aged 0-5 years on MRI. The effect of age and gender on gland size was evaluated. Linear regression analysis was performed to analyze the relation between size and age. Ninety-nine percent prediction intervals around the mean were added to construct a normal size range per age, with the upper bound of the predictive interval as the parameter of interest as a cutoff for normalcy. RESULTS: There was no significant interaction of gender and age for all the three pineal gland parameters (width, height, and area). Linear regression analysis gave 99 % upper prediction bounds of 7.9, 4.8, and 25.4 mm(2), respectively, for width, height, and area. The slopes (size increase per month) of each parameter were 0.046, 0.023, and 0.202, respectively. Ninety-three percent (95 % CI 66-100 %) of asymptomatic solid pineoblastomas were larger in size than the 99 % upper bound. CONCLUSION: This study establishes norms for solid pineal gland size in non-retinoblastoma children aged 0-5 years. Knowledge of the size of the normal pineal gland is helpful for detection of pineal gland abnormalities, particularly pineoblastoma.