Essays on risk aversion, diversification and non -participation

My dissertation consists of three essays. The central theme of these essays is the psychological factors and biases that affect the portfolio allocation decision. The first essay entitled, “Are women more risk-averse than men?” examines the gender difference in risk aversion as revealed by actual investment choices. Using a sample that controls for biases in the level of education and finance knowledge, there is evidence that when individuals have the same level of education, irrespective of their knowledge of finance, women are no more risk-averse than their male counterparts. However, the gender-risk aversion relation is also a function of age, income, wealth, marital status, race/ethnicity and the number of children in the household. The second essay entitled, “Can diversification be learned ?” investigates if investors who have superior investment knowledge are more likely to actively seek diversification benefits and are less prone to allocation biases. Results of cross-sectional analyses suggest that knowledge of finance increases the likelihood that an investor will efficiently allocate his direct investments across the major asset classes; invest in foreign assets; and hold a diversified equity portfolio. However, there is no evidence that investors who are more financially sophisticated make superior allocation decisions in their retirement savings. The final essay entitled, “The demographics of non-participation ”, examines the factors that affect the decision not to hold stocks. The results of probit regression models indicate that when individuals are highly educated, the decision to not participate in the stock market is less related to demographic factors. In particular, when individuals have attained at least a college degree and have advanced knowledge of finance, they are significantly more likely to invest in equities either directly or indirectly through mutual funds or their retirement savings. There is also evidence that the decision not to hold stocks is motivated by short-term market expectations and the most recent investment experience. The findings of these essays should increase the body of research that seeks to reconcile what investors actually do (positive theory) with what traditional theories of finance predict that investors should do (normative theory).

Essays on Risk Aversion, Diversification and Non-Participation

My dissertation consists of three essays. The central theme of these essays is the psychological factors and biases that affect the portfolio allocation decision. The first essay entitled, “Are women more risk-averse than men?” examines the gender difference in risk aversion as revealed by actual investment choices. Using a sample that controls for biases in the level of education and finance knowledge, there is evidence that when individuals have the same level of education, irrespective of their knowledge of finance, women are no more risk-averse than their male counterparts. However, the gender-risk aversion relation is also a function of age, income, wealth, marital status, race/ethnicity and the number of children in the household. The second essay entitled, “Can diversification be learned?” investigates if investors who have superior investment knowledge are more likely to actively seek diversification benefits and are less prone to allocation biases. Results of cross-sectional analyses suggest that knowledge of finance increases the likelihood that an investor will efficiently allocate his direct investments across the major asset classes; invest in foreign assets; and hold a diversified equity portfolio. However, there is no evidence that investors who are more financially sophisticated make superior allocation decisions in their retirement savings. The final essay entitled, “The demographics of non-participation”, examines the factors that affect the decision not to hold stocks. The results of probit regression models indicate that when individuals are highly educated, the decision to not participate in the stock market is less related to demographic factors. In particular, when individuals have attained at least a college degree and have advanced knowledge of finance, they are significantly more likely to invest in equities either directly or indirectly through mutual funds or their retirement savings. There is also evidence that the decision not to hold stocks is motivated by short-term market expectations and the most recent investment experience. The findings of these essays should increase the body of research that seeks to reconcile what investors actually do (positive theory) with what traditional theories of finance predict that investors should do (normative theory).

Theory of foreign portfolio investment

This dissertation examines one category of international capital flows, private portfolio investments (private refers to the source of capital). There is an overall lack of a coherent and consistent definition of foreign portfolio investment. We clarify these definitional issues.^ Two main questions that pertain to private foreign portfolio investments (FPI) are explored. The first problem is the phenomenon of home preference, often referred to as home bias. Related to this are the observed cross-investment flows between countries that seem to contradict the textbook rendition of private FPI. A description of the theories purporting to resolve the home preference puzzle (and the cross-investment one) are summarized and evaluated. Most of this literature considers investors from major developed countries. I consider--as well--whether investors in less developed countries have home preference.^ The dissertation shows that home preference is indeed pervasive and profound across countries, in both developed and emerging markets. For the U.S., I examine home bias in both equity and bond holdings as well. I find that home bias is greater when we look at equity and bond holdings than equity holdings solely.^ In this dissertation a model is developed to explain home bias. This model is original and fills a gap in the literature as there have been no satisfactory models that handle at the same time both home preference and cross-border holdings in the context of information asymmetries. This model reflects what we see in the data and permits us to reach certain results by the use of comparative statics methods. The model suggests, counter-intuitively, that as the rate of return in a country relative to the world rate of return increases, home preference decreases. In the context of our relatively simple model we ascribe this result to the higher variance of the now higher return for home assets. We also find, this time as intended, that as risk aversion increases, investors diversify further so that home preference decreases.^ The second question that the dissertation deals with is the volatility of private foreign portfolio investment. Countries that are recipients of these flows have been wary of such flows because of their perceived volatility. Often the contrast is made with the perceived absence of volatility in foreign direct investment flows. I analyze the validity of these concerns using first net flow data and then gross flow data. The results show that FPI is not, in relative terms, more volatile than other flows in our sample of eight countries (half were developed countries and the rest were emerging markets).^ The implication therefore is that restricting FPI flows may be harmful in the sense that private capital may not be allocated efficiently worldwide to the detriment of capital poor economies. More to the point, any such restrictions would in fact be misguided. ^

Three essays on asset pricing

In this dissertation, I investigate three related topics on asset pricing: the consumption-based asset pricing under long-run risks and fat tails, the pricing of VIX (CBOE Volatility Index) options and the market price of risk embedded in stock returns and stock options. These three topics are fully explored in Chapter II through IV. Chapter V summarizes the main conclusions. In Chapter II, I explore the effects of fat tails on the equilibrium implications of the long run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. I estimate the structural parameters of the proposed model by maximum likelihood. I find that the stochastic volatility model with fat tails can, without resorting to high risk aversion, generate implied risk premium, expected risk free rate and their volatilities comparable to the magnitudes observed in data. In Chapter III, I examine the pricing performance of VIX option models. The contention that simpler-is-better is supported by the empirical evidence using actual VIX option market data. I find that no model has small pricing errors over the entire range of strike prices and times to expiration. In general, Whaley’s Black-like option model produces the best overall results, supporting the simpler-is-better contention. However, the Whaley model does under/overprice out-of-the-money call/put VIX options, which is contrary to the behavior of stock index option pricing models. In Chapter IV, I explore risk pricing through a model of time-changed Lvy processes based on the joint evidence from individual stock options and underlying stocks. I specify a pricing kernel that prices idiosyncratic and systematic risks. This approach to examining risk premia on stocks deviates from existing studies. The empirical results show that the market pays positive premia for idiosyncratic and market jump-diffusion risk, and idiosyncratic volatility risk. However, there is no consensus on the premium for market volatility risk. It can be positive or negative. The positive premium on idiosyncratic risk runs contrary to the implications of traditional capital asset pricing theory.

Sea level rise and South Florida coastal forests

Coastal ecosystems lie at the forefront of sea level rise. We posit that before the onset of actual inundation, sea level rise will influence the species composition of coastal hardwood hammocks and buttonwood (Conocarpus erectus L.) forests of the Everglades National Park based on tolerance to drought and salinity. Precipitation is the major water source in coastal hammocks and is stored in the soil vadose zone, but vadose water will diminish with the rising water table as a consequence of sea level rise, thereby subjecting plants to salt water stress. A model is used to demonstrate that the constraining effect of salinity on transpiration limits the distribution of freshwater-dependent communities. Field data collected in hardwood hammocks and coastal buttonwood forests over 11 years show that halophytes have replaced glycophytes. We establish that sea level rise threatens 21 rare coastal species in Everglades National Park and estimate the relative risk to each species using basic life history and population traits. We review salinity conditions in the estuarine region over 1999–2009 and associate wide variability in the extent of the annual seawater intrusion to variation in freshwater inflows and precipitation. We also examine species composition in coastal and inland hammocks in connection with distance from the coast, depth to water table, and groundwater salinity. Though this study focuses on coastal forests and rare species of South Florida, it has implications for coastal forests threatened by saltwater intrusion across the globe.

Three Essays on Asset Pricing

In this dissertation, I investigate three related topics on asset pricing: the consumption-based asset pricing under long-run risks and fat tails, the pricing of VIX (CBOE Volatility Index) options and the market price of risk embedded in stock returns and stock options. These three topics are fully explored in Chapter II through IV. Chapter V summarizes the main conclusions. In Chapter II, I explore the effects of fat tails on the equilibrium implications of the long run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. I estimate the structural parameters of the proposed model by maximum likelihood. I find that the stochastic volatility model with fat tails can, without resorting to high risk aversion, generate implied risk premium, expected risk free rate and their volatilities comparable to the magnitudes observed in data. In Chapter III, I examine the pricing performance of VIX option models. The contention that simpler-is-better is supported by the empirical evidence using actual VIX option market data. I find that no model has small pricing errors over the entire range of strike prices and times to expiration. In general, Whaley’s Black-like option model produces the best overall results, supporting the simpler-is-better contention. However, the Whaley model does under/overprice out-of-the-money call/put VIX options, which is contrary to the behavior of stock index option pricing models. In Chapter IV, I explore risk pricing through a model of time-changed Lévy processes based on the joint evidence from individual stock options and underlying stocks. I specify a pricing kernel that prices idiosyncratic and systematic risks. This approach to examining risk premia on stocks deviates from existing studies. The empirical results show that the market pays positive premia for idiosyncratic and market jump-diffusion risk, and idiosyncratic volatility risk. However, there is no consensus on the premium for market volatility risk. It can be positive or negative. The positive premium on idiosyncratic risk runs contrary to the implications of traditional capital asset pricing theory.

Effects of adolescent depressive symptoms, pubertal development, and interpersonal relationship satisfaction on sexual risk behaviors in adolescent romantic couples

This study examined links between adolescent depressive symptoms, actual pubertal development, perceived pubertal timing relative to one’s peers, adolescent-maternal relationship satisfaction, and couple sexual behavior. Assessments of these variables were made on each couple member separately and then these variables were used to predict the sexual activity of the couple. Participants were drawn from the National Longitudinal Study of Adolescent Health (Add Health; Bearman et al., 1997; Udry, 1997) data set (N = 20,088; aged 12–18 years). Dimensions of adolescent romantic experiences using the total sample were described and then a subsample of romantically paired adolescents ( n = 1,252) were used to test a risk and protective model for predicting couple sexual behavior using the factors noted above. Relevant measures from the Wave 1 Add Health measures were used. Most of the items used in Add Health to assess romantic relationship experiences, adolescent depressive symptoms, pubertal development (actual and perceived), adolescent-maternal relationship satisfaction, and couple sexual behavior were drawn from other national surveys or from scales with well documented psychometric properties. Results demonstrated that romantic relationships are part of most adolescents’ lives and that adolescents’ experiences with these relationships differ markedly by age, sex, and race/ethnicity. Further, each respective couple member’s pubertal development, perceived pubertal timing, and maternal relationship satisfaction were useful in predicting sexual risk-promoting and risk-reducing behaviors in adolescent romantic couples. Findings in this dissertation represent an initial step toward evaluating explanatory models of adolescent couple sexual behavior.

Exploring therapy process and outcome in interventions that target at risk adolescents

The purpose of this study was to conduct a larger scale replication and extension study on the use of a Session Impact Measure the Session Evaluation Form. Ninety-one public high school students in Miami Florida were obtained through self or counselor referrals and placed in one or two of five counseling groups for one or two school semesters. To investigate differences in therapy processes across counseling groups, participants were administered a Session Evaluation Form at the end of each therapy session. This assessed group members' perception of four therapy process domains, Group, Facilitator, Skills and Exploration Impacts. The pattern significant results for the MANOVAs provided strong evidence for the greater impact of the group on therapy process relative to the impact of facilitator. Further research is needed to identify more specifically, ways, group process differences interact with other treatment variables.

Effects of Adolescent Depressive Symptoms, Pubertal Development, and Interpersonal Relationship Satisfaction on Sexual Risk Behaviors in Adolescent Romantic Couples

This study examined links between adolescent depressive symptoms, actual pubertal development, perceived pubertal timing relative to one’s peers, adolescent-maternal relationship satisfaction, and couple sexual behavior. Assessments of these variables were made on each couple member separately and then these variables were used to predict the sexual activity of the couple. Participants were drawn from the National Longitudinal Study of Adolescent Health (Add Health; Bearman et al., 1997; Udry, 1997) data set (N = 20,088; aged 12-18 years). Dimensions of adolescent romantic experiences using the total sample were described and then a subsample of romantically paired adolescents (n = 1,252) were used to test a risk and protective model for predicting couple sexual behavior using the factors noted above. Relevant measures from the Wave 1 Add Health measures were used. Most of the items used in Add Health to assess romantic relationship experiences, adolescent depressive symptoms, pubertal development (actual and perceived), adolescent-maternal relationship satisfaction, and couple sexual behavior were drawn from other national surveys or from scales with well documented psychometric properties. Results demonstrated that romantic relationships are part of most adolescents’ lives and that adolescents’ experiences with these relationships differ markedly by age, sex, and race/ethnicity. Further, each respective couple member’s pubertal development, perceived pubertal timing, and maternal relationship satisfaction were useful in predicting sexual risk-promoting and risk-reducing behaviors in adolescent romantic couples. Findings in this dissertation represent an initial step toward evaluating explanatory models of adolescent couple sexual behavior.