Three essays in financial economics: asset pricing, optimal portfolio selection and financial integration

Executive Summary The unifying theme of this thesis is the pursuit of a satisfactory ways to quantify the riskureward trade-off in financial economics. First in the context of a general asset pricing model, then across models and finally across country borders. The guiding principle in that pursuit was to seek innovative solutions by combining ideas from different fields in economics and broad scientific research. For example, in the first part of this thesis we sought a fruitful application of strong existence results in utility theory to topics in asset pricing. In the second part we implement an idea from the field of fuzzy set theory to the optimal portfolio selection problem, while the third part of this thesis is to the best of our knowledge, the first empirical application of some general results in asset pricing in incomplete markets to the important topic of measurement of financial integration. While the first two parts of this thesis effectively combine well-known ways to quantify the risk-reward trade-offs the third one can be viewed as an empirical verification of the usefulness of the so-called "good deal bounds" theory in designing risk-sensitive pricing bounds. Chapter 1 develops a discrete-time asset pricing model, based on a novel ordinally equivalent representation of recursive utility. To the best of our knowledge, we are the first to use a member of a novel class of recursive utility generators to construct a representative agent model to address some long-lasting issues in asset pricing. Applying strong representation results allows us to show that the model features countercyclical risk premia, for both consumption and financial risk, together with low and procyclical risk free rate. As the recursive utility used nests as a special case the well-known time-state separable utility, all results nest the corresponding ones from the standard model and thus shed light on its well-known shortcomings. The empirical investigation to support these theoretical results, however, showed that as long as one resorts to econometric methods based on approximating conditional moments with unconditional ones, it is not possible to distinguish the model we propose from the standard one. Chapter 2 is a join work with Sergei Sontchik. There we provide theoretical and empirical motivation for aggregation of performance measures. The main idea is that as it makes sense to apply several performance measures ex-post, it also makes sense to base optimal portfolio selection on ex-ante maximization of as many possible performance measures as desired. We thus offer a concrete algorithm for optimal portfolio selection via ex-ante optimization over different horizons of several risk-return trade-offs simultaneously. An empirical application of that algorithm, using seven popular performance measures, suggests that realized returns feature better distributional characteristics relative to those of realized returns from portfolio strategies optimal with respect to single performance measures. When comparing the distributions of realized returns we used two partial risk-reward orderings first and second order stochastic dominance. We first used the Kolmogorov Smirnov test to determine if the two distributions are indeed different, which combined with a visual inspection allowed us to demonstrate that the way we propose to aggregate performance measures leads to portfolio realized returns that first order stochastically dominate the ones that result from optimization only with respect to, for example, Treynor ratio and Jensen's alpha. We checked for second order stochastic dominance via point wise comparison of the so-called absolute Lorenz curve, or the sequence of expected shortfalls for a range of quantiles. As soon as the plot of the absolute Lorenz curve for the aggregated performance measures was above the one corresponding to each individual measure, we were tempted to conclude that the algorithm we propose leads to portfolio returns distribution that second order stochastically dominates virtually all performance measures considered. Chapter 3 proposes a measure of financial integration, based on recent advances in asset pricing in incomplete markets. Given a base market (a set of traded assets) and an index of another market, we propose to measure financial integration through time by the size of the spread between the pricing bounds of the market index, relative to the base market. The bigger the spread around country index A, viewed from market B, the less integrated markets A and B are. We investigate the presence of structural breaks in the size of the spread for EMU member country indices before and after the introduction of the Euro. We find evidence that both the level and the volatility of our financial integration measure increased after the introduction of the Euro. That counterintuitive result suggests the presence of an inherent weakness in the attempt to measure financial integration independently of economic fundamentals. Nevertheless, the results about the bounds on the risk free rate appear plausible from the view point of existing economic theory about the impact of integration on interest rates.

Optimal fiscal policy in overlapping generations models

[eng] This paper provides, from a theoretical and quantitative point of view, an explanation of why taxes on capital returns are high (around 35%) by analyzing the optimal fiscal policy in an economy with intergenerational redistribution. For this purpose, the government is modeled explicitly and can choose (and commit to) an optimal tax policy in order to maximize society's welfare. In an infinitely lived economy with heterogeneous agents, the long run optimal capital tax is zero. If heterogeneity is due to the existence of overlapping generations, this result in general is no longer true. I provide sufficient conditions for zero capital and labor taxes, and show that a general class of preferences, commonly used on the macro and public finance literature, violate these conditions. For a version of the model, calibrated to the US economy, the main results are: first, if the government is restricted to a set of instruments, the observed fiscal policy cannot be disregarded as sub optimal and capital taxes are positive and quantitatively relevant. Second, if the government can use age specific taxes for each generation, then the age profile capital tax pattern implies subsidizing asset returns of the younger generations and taxing at higher rates the asset returns of the older ones.

Interiority of the optimal population growth rate with endogenous fertility

This paper analyzes the issue of the interiority of the optimal population growth rate in a two-period overlapping generations model with endogenous fertility. Using Cobb-Douglas utility and production functions, we show that the introduction of a cost of raising children allows for the possibility of the existence of an interior global maximum in the planner¿s problem, contrary to the exogenous fertility case

Role of rifampin against Propionibacterium acnes biofilm in vitro and in an experimental foreign-body infection model.

Propionibacterium acnes is an important cause of orthopedic-implant-associated infections, for which the optimal treatment has not yet been determined. We investigated the activity of rifampin, alone and in combination, against planktonic and biofilm P. acnes in vitro and in a foreign-body infection model. The MIC and the minimal bactericidal concentration (MBC) were 0.007 and 4 μg/ml for rifampin, 1 and 4 μg/ml for daptomycin, 1 and 8 μg/ml for vancomycin, 1 and 2 μg/ml for levofloxacin, 0.03 and 16 μg/ml for penicillin G, 0.125 and 512 μg/ml for clindamycin, and 0.25 and 32 μg/ml for ceftriaxone. The P. acnes minimal biofilm eradication concentration (MBEC) was 16 μg/ml for rifampin; 32 μg/ml for penicillin G; 64 μg/ml for daptomycin and ceftriaxone; and ≥128 μg/ml for levofloxacin, vancomycin, and clindamycin. In the animal model, implants were infected by injection of 10⁹ CFU P. acnes in cages. Antimicrobial activity on P. acnes was investigated in the cage fluid (planktonic form) and on explanted cages (biofilm form). The cure rates were 4% for daptomycin, 17% for vancomycin, 0% for levofloxacin, and 36% for rifampin. Rifampin cured 63% of the infected cages in combination with daptomycin, 46% with vancomycin, and 25% with levofloxacin. While all tested antimicrobials showed good activity against planktonic P. acnes, for eradication of biofilms, rifampin was needed. In combination with rifampin, daptomycin showed higher cure rates than with vancomycin in this foreign-body infection model.

Optimal dividend strategies for a compound Poisson risk process under transaction costs and power utility

We characterize the value function of maximizing the total discounted utility of dividend payments for a compound Poisson insurance risk model when strictly positive transaction costs are included, leading to an impulse control problem. We illustrate that well known simple strategies can be optimal in the case of exponential claim amounts. Finally we develop a numerical procedure to deal with general claim amount distributions.

Examination of Curing Criteria for Cold In-Place Recycling (Phase 3: Calibration of Moisture Loss Indices and Development of Stiffness Gain Model), TR-609, 2011

In the previous study, moisture loss indices were developed based on the field measurements from one CIR-foam and one CIR-emulsion construction sites. To calibrate these moisture loss indices, additional CIR construction sites were monitored using embedded moisture and temperature sensors. In addition, to determine the optimum timing of an HMA overlay on the CIR layer, the potential of using the stiffness of CIR layer measured by geo-gauge instead of the moisture measurement by a nuclear gauge was explored. Based on the monitoring the moisture and stiffness from seven CIR project sites, the following conclusions are derived: 1. In some cases, the in-situ stiffness remained constant and, in other cases, despite some rainfalls, stiffness of the CIR layers steadily increased during the curing time. 2. The stiffness measured by geo-gauge was affected by a significant amount of rainfall. 3. The moisture indices developed for CIR sites can be used for predicting moisture level in a typical CIR project. The initial moisture content and temperature were the most significant factors in predicting the future moisture content in the CIR layer. 4. The stiffness of a CIR layer is an extremely useful tool for contractors to use for timing their HMA overlay. To determine the optimal timing of an HMA overlay, it is recommended that the moisture loss index should be used in conjunction with the stiffness of the CIR layer.

Genotype by environment interaction for seed yield per plant in rapeseed using AMMI model

The objective of this study was to assess genotype by environment interaction for seed yield per plant in rapeseed cultivars grown in Northern Serbia by the AMMI (additive main effects and multiplicative interaction) model. The study comprised 19 rapeseed genotypes, analyzed in seven years through field trials arranged in a randomized complete block design, with three replicates. Seed yield per plant of the tested cultivars varied from 1.82 to 19.47 g throughout the seven seasons, with an average of 7.41 g. In the variance analysis, 72.49% of the total yield variation was explained by environment, 7.71% by differences between genotypes, and 19.09% by genotype by environment interaction. On the biplot, cultivars with high yield genetic potential had positive correlation with the seasons with optimal growing conditions, while the cultivars with lower yield potential were correlated to the years with unfavorable conditions. Seed yield per plant is highly influenced by environmental factors, which indicates the adaptability of specific genotypes to specific seasons.

Continuous positive airway pressure causes lung injury in a model of sepsis.

Continuous positive airway pressure, aimed at preventing pulmonary atelectasis, has been used for decades to reduce lung injury in critically ill patients. In neonatal practice, it is increasingly used worldwide as a primary form of respiratory support due to its low cost and because it reduces the need for endotracheal intubation and conventional mechanical ventilation. We studied the anesthetized in vivo rat and determined the optimal circuit design for delivery of continuous positive airway pressure. We investigated the effects of continuous positive airway pressure following lipopolysaccharide administration in the anesthetized rat. Whereas neither continuous positive airway pressure nor lipopolysaccharide alone caused lung injury, continuous positive airway pressure applied following intravenous lipopolysaccharide resulted in increased microvascular permeability, elevated cytokine protein and mRNA production, and impaired static compliance. A dose-response relationship was demonstrated whereby higher levels of continuous positive airway pressure (up to 6 cmH(2)O) caused greater lung injury. Lung injury was attenuated by pretreatment with dexamethasone. These data demonstrate that despite optimal circuit design, continuous positive airway pressure causes significant lung injury (proportional to the airway pressure) in the setting of circulating lipopolysaccharide. Although we would currently avoid direct extrapolation of these findings to clinical practice, we believe that in the context of increasing clinical use, these data are grounds for concern and warrant further investigation.

Selective catalytic reduction of nitrogen oxides with ammonia in forced unsteady state reactors - Case based reasoning and mathematical model simulation reasoning

The application of forced unsteady-state reactors in case of selective catalytic reduction of nitrogen oxides (NOx) with ammonia (NH3) is sustained by the fact that favorable temperature and composition distributions which cannot be achieved in any steady-state regime can be obtained by means of unsteady-state operations. In a normal way of operation the low exothermicity of the selective catalytic reduction (SCR) reaction (usually carried out in the range of 280-350°C) is not enough to maintain by itself the chemical reaction. A normal mode of operation usually requires supply of supplementary heat increasing in this way the overall process operation cost. Through forced unsteady-state operation, the main advantage that can be obtained when exothermic reactions take place is the possibility of trapping, beside the ammonia, the moving heat wave inside the catalytic bed. The unsteady state-operation enables the exploitation of the thermal storage capacity of the catalyticbed. The catalytic bed acts as a regenerative heat exchanger allowing auto-thermal behaviour when the adiabatic temperature rise is low. Finding the optimum reactor configuration, employing the most suitable operation model and identifying the reactor behavior are highly important steps in order to configure a proper device for industrial applications. The Reverse Flow Reactor (RFR) - a forced unsteady state reactor - corresponds to the above mentioned characteristics and may be employed as an efficient device for the treatment of dilute pollutant mixtures. As a main disadvantage, beside its advantages, the RFR presents the 'wash out' phenomena. This phenomenon represents emissions of unconverted reactants at every switch of the flow direction. As a consequence our attention was focused on finding an alternative reactor configuration for RFR which is not affected by the incontrollable emissions of unconverted reactants. In this respect the Reactor Network (RN) was investigated. Its configuration consists of several reactors connected in a closed sequence, simulating a moving bed by changing the reactants feeding position. In the RN the flow direction is maintained in the same way ensuring uniformcatalyst exploitation and in the same time the 'wash out' phenomena is annulated. The simulated moving bed (SMB) can operate in transient mode giving practically constant exit concentration and high conversion levels. The main advantage of the reactor network operation is emphasizedby the possibility to obtain auto-thermal behavior with nearly uniformcatalyst utilization. However, the reactor network presents only a small range of switching times which allow to reach and to maintain an ignited state. Even so a proper study of the complex behavior of the RN may give the necessary information to overcome all the difficulties that can appear in the RN operation. The unsteady-state reactors complexity arises from the fact that these reactor types are characterized by short contact times and complex interaction between heat and mass transportphenomena. Such complex interactions can give rise to a remarkable complex dynamic behavior characterized by a set of spatial-temporal patterns, chaotic changes in concentration and traveling waves of heat or chemical reactivity. The main efforts of the current research studies concern the improvement of contact modalities between reactants, the possibility of thermal wave storage inside the reactor and the improvement of the kinetic activity of the catalyst used. Paying attention to the above mentioned aspects is important when higher activity even at low feeding temperatures and low emissions of unconverted reactants are the main operation concerns. Also, the prediction of the reactor pseudo or steady-state performance (regarding the conversion, selectivity and thermal behavior) and the dynamicreactor response during exploitation are important aspects in finding the optimal control strategy for the forced unsteady state catalytic tubular reactors. The design of an adapted reactor requires knowledge about the influence of its operating conditions on the overall process performance and a precise evaluation of the operating parameters rage for which a sustained dynamic behavior is obtained. An apriori estimation of the system parameters result in diminution of the computational efforts. Usually the convergence of unsteady state reactor systems requires integration over hundreds of cycles depending on the initial guess of the parameter values. The investigation of various operation models and thermal transfer strategies give reliable means to obtain recuperative and regenerative devices which are capable to maintain an auto-thermal behavior in case of low exothermic reactions. In the present research work a gradual analysis of the SCR of NOx with ammonia process in forced unsteady-state reactors was realized. The investigation covers the presentationof the general problematic related to the effect of noxious emissions in the environment, the analysis of the suitable catalysts types for the process, the mathematical analysis approach for modeling and finding the system solutions and the experimental investigation of the device found to be more suitable for the present process. In order to gain information about the forced unsteady state reactor design, operation, important system parameters and their values, mathematical description, mathematicalmethod for solving systems of partial differential equations and other specific aspects, in a fast and easy way, and a case based reasoning (CBR) approach has been used. This approach, using the experience of past similarproblems and their adapted solutions, may provide a method for gaining informations and solutions for new problems related to the forced unsteady state reactors technology. As a consequence a CBR system was implemented and a corresponding tool was developed. Further on, grooving up the hypothesis of isothermal operation, the investigation by means of numerical simulation of the feasibility of the SCR of NOx with ammonia in the RFRand in the RN with variable feeding position was realized. The hypothesis of non-isothermal operation was taken into account because in our opinion ifa commercial catalyst is considered, is not possible to modify the chemical activity and its adsorptive capacity to improve the operation butis possible to change the operation regime. In order to identify the most suitable device for the unsteady state reduction of NOx with ammonia, considering the perspective of recuperative and regenerative devices, a comparative analysis of the above mentioned two devices performance was realized. The assumption of isothermal conditions in the beginningof the forced unsteadystate investigation allowed the simplification of the analysis enabling to focus on the impact of the conditions and mode of operation on the dynamic features caused by the trapping of one reactant in the reactor, without considering the impact of thermal effect on overall reactor performance. The non-isothermal system approach has been investigated in order to point out the important influence of the thermal effect on overall reactor performance, studying the possibility of RFR and RN utilization as recuperative and regenerative devices and the possibility of achieving a sustained auto-thermal behavior in case of lowexothermic reaction of SCR of NOx with ammonia and low temperature gasfeeding. Beside the influence of the thermal effect, the influence of the principal operating parameters, as switching time, inlet flow rate and initial catalyst temperature have been stressed. This analysis is important not only because it allows a comparison between the two devices and optimisation of the operation, but also the switching time is the main operating parameter. An appropriate choice of this parameter enables the fulfilment of the process constraints. The level of the conversions achieved, the more uniform temperature profiles, the uniformity ofcatalyst exploitation and the much simpler mode of operation imposed the RN as a much more suitable device for SCR of NOx with ammonia, in usual operation and also in the perspective of control strategy implementation. Theoretical simplified models have also been proposed in order to describe the forced unsteady state reactors performance and to estimate their internal temperature and concentration profiles. The general idea was to extend the study of catalytic reactor dynamics taking into account the perspectives that haven't been analyzed yet. The experimental investigation ofRN revealed a good agreement between the data obtained by model simulation and the ones obtained experimentally.

Developing finished product stocking in a ventilation equipment company

Opinnäytetyön tavoitteena oli analysoida ja kehittää lopputuotteiden varastointia Halton Oy:ssä. Työ toteutettiin, koska yrityksen laajasta tuotevalikoimasta monia nimikkeitä varastoidaan tällä hetkellä ja ne sitovat runsaasti pääomaa varastoon. Lisäksi yrityksellä on vain rajallinen varastointitila käytettävissä ja sitä haluttiin hyödyntää optimaalisesti. Työssä suunniteltiin yritykselle varastoitavien tuotenimikkeiden hallintaprosessi ja lisäksi tutkittiin kuinka yritys voisi tarjota tuotteitaan nopeammin tärkeimmille ulkomaan markkina-alueille. Työn alussa huomio kohdistui myynniltään vähemmän merkittäviin varastonimikkeisiin, joita analysoitiin suunniteltujen kriteerien avulla. Tarkoituksena oli selvittää, mitkä varastonimikkeistä voitaisiin siirtää tilausohjautuviksi. Tärkeimpinä analysointikriteereinä käytettiin nimikkeiden alhaista myyntimäärää, lyhyttä tuotannonläpimenoaikaa sekä varastoitavien nimikkeiden lukumäärää tuoteryhmässä. Työssä huomioitiin kuitenkin myös muita mahdollisia syitä varastointiin. Lisäksi tehtiin havaintoja tilausohjautuvista nimikkeistä, jotka saattaisivat tarvita varastointia. Suunniteltuun hallintaprosessiin sisältyi kriteerien lisäksi myös varastotasojen määrittäminen yrityksen nykyisen varastomallin pohjalta. Työssä tutkittiin kuitenkin myös mahdollisia tulevaisuuden varastomalleja, joiden tarkoituksena olisi parantaa asiakaspalvelua ulkomailla. Tutkimus keskittyi pääasiassa nimikkeiden kysyntöjen analysointiin eri varastomallien myyntialueilla.

Gene filtering with optimal threshold selection

Gene filtering is a useful preprocessing technique often applied to microarray datasets. However, it is no common practice because clear guidelines are lacking and it bears the risk of excluding some potentially relevant genes. In this work, we propose to model microarray data as a mixture of two Gaussian distributions that will allow us to obtain an optimal filter threshold in terms of the gene expression level.

Cancer testiculaire: un modèle pour optimiser le suivi radiologique [Testicular cancer: a model to optimize the radiological follow-up].

Le cancer testiculaire, bien que peu fréquent, revêt une importance particulière en oncologie ; il représente actuellement un modèle pour optimiser un suivi radiologique tout en essayant de diminuer l'apparition de tumeurs radio-induites.En effet, cette pathologie présente un taux très élevé de survie nécessitant, au vu du jeune âge des patients, des bilans radiologiques à long terme, auxquels pourront être liés des effets secondaires, en particulier les tumeurs secondaires.Afin de diminuer cela, les recommandations de prise en charge ont évolué et les protocoles de radiologie s'améliorent afin d'exposer à moins de rayonnements ionisants pour un résultat identique.Il est donc devenu primordial de maintenir un suivi optimal tout en essayant d'en minimiser la toxicité. Despite being rare cancers, testicular seminoma and non-seminoma play an important role in oncology: they represent a model on how to optimize radiological follow-up, aiming at a lowest possible radiation exposure and secondary cancer risk. Males diagnosed with testicular cancer undergo frequently prolonged follow-up with CT-scans with potential toxic side effects, in particular secondary cancers. To reduce the risks linked to ionizing radiation, precise follow-up protocols have been developed. The number of recommended CT-scanners has been significantly reduced over the last 10 years. The CT scanners have evolved technically and new acquisition protocols have the potential to reduce the radiation exposure further.

Establishing Zebrafish as a Novel Exercise Model: Swimming Economy, Swimming-enhanced Growth and Muscle Growth Marker Gene Expression

Zebrafish has been largely accepted as a vertebrate multidisciplinary model but its usefulness as a model for exercise physiology has been hampered by the scarce knowledge on its swimming economy, optimal swimming speeds and cost of transport. Therefore, we have performed individual and group-wise swimming experiments to quantify swimming economy and to demonstrate the exercise effects on growth in adult zebrafish.

Optimal trading of wind power in the short term market

The energy reform, which is happening all over the world, is caused by the common concern of the future of the humankind in our shared planet. In order to keep the effects of the global warming inside of a certain limit, the use of fossil fuels must be reduced. The marginal costs of the renewable sources, RES are quite high, since they are new technology. In order to induce the implementation of RES to the power grid and lower the marginal costs, subsidies were developed in order to make the use of RES more profitable. From the RES perspective the current market is developed to favor conventional generation, which mainly uses fossil fuels. Intermittent generation, like wind power, is penalized in the electricity market since it is intermittent and thus diffi-cult to control. Therefore, the need of regulation and thus the regulation costs to the producer differ, depending on what kind of generation market participant owns. In this thesis it is studied if there is a way for market participant, who has wind power to use the special characteristics of electricity market Nord Pool and thus reach the gap between conventional generation and the intermittent generation only by placing bids to the market. Thus, an optimal bid is introduced, which purpose is to minimize the regulation costs and thus lower the marginal costs of wind power. In order to make real life simulations in Nord Pool, a wind power forecast model was created. The simulations were done in years 2009 and 2010 by using a real wind power data provided by Hyötytuuli, market data from Nord Pool and wind forecast data provided by Finnish Meteorological Institute. The optimal bid needs probability intervals and therefore the methodology to create probability distributions is introduced in this thesis. In the end of the thesis it is shown that the optimal bidding improves the position of wind power producer in the electricity market.

Testing Futures Market Efficiency and Optimal Hedge Ratio Estimation: Evidence from Futures and Options on RTS

This study investigates futures market efficiency and optimal hedge ratio estimation. First, cointegration between spot and futures prices is studied using Johansen method, with two different model specifications. If prices are found cointegrated, restrictions on cointegrating vector and adjustment coefficients are imposed, to account for unbiasedness, weak exogeneity and prediction hypothesis. Second, optimal hedge ratios are estimated using static OLS, and time-varying DVEC and CCC models. In-sample and out-of-sample results for one, two and five period ahead are reported. The futures used in thesis are RTS index, EUR/RUB exchange rate and Brent oil, traded in Futures and options on RTS.(FORTS) For in-sample period, data points were acquired from start of trading of each futures contract, RTS index from August 2005, EUR/RUB exchange rate March 2009 and Brent oil October 2008, lasting till end of May 2011. Out-of-sample period covers start of June 2011, till end of December 2011. Our results indicate that all three asset pairs, spot and futures, are cointegrated. We found RTS index futures to be unbiased predictor of spot price, mixed evidence for exchange rate, and for Brent oil futures unbiasedness was not supported. Weak exogeneity results for all pairs indicated spot price to lead in price discovery process. Prediction hypothesis, unbiasedness and weak exogeneity of futures, was rejected for all asset pairs. Variance reduction results varied between assets, in-sample in range of 40-85 percent and out-of sample in range of 40-96 percent. Differences between models were found small, except for Brent oil in which OLS clearly dominated. Out-of-sample results indicated exceptionally high variance reduction for RTS index, approximately 95 percent.