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.

Design and construction of precision heat fluxmeters

The possibility of local elastic instabilities is considered in a first¿order structural phase transition, typically a thermoelastic martensitic transformation, with associated interfacial and volumic strain energy. They appear, for instance, as the result of shape change accommodation by simultaneous growth of different crystallographic variants. The treatment is phenomenological and deals with growth in both thermoelastic equilibrium and in nonequilibrium conditions produced by the elastic instability. Scaling of the transformed fraction curves against temperature is predicted only in the case of purely thermoelastic growth. The role of the transformation latent heat on the relaxation kinetics is also considered, and it is shown that it tends to increase the characteristic relaxation times as adiabatic conditions are approached, by keeping the system closer to a constant temperature. The analysis also reveals that the energy dissipated in the relaxation process has a double origin: release of elastic energy Wi and entropy production Si. The latter is shown to depend on both temperature rate and thermal conduction in the system.

Randomized controlled trial of interventions for young people at ultra-high risk of psychosis: study design and baseline characteristics.

OBJECTIVE: Intervention during the pre-psychotic period of illness holds the potential of delaying or even preventing the onset of a full-threshold disorder, or at least of reducing the impact of such a disorder if it does develop. The first step in realizing this aim was achieved more than 10 years ago with the development and validation of criteria for the identification of young people at ultra-high risk (UHR) of psychosis. Results of three clinical trials have been published that provide mixed support for the effectiveness of psychological and pharmacological interventions in preventing the onset of psychotic disorder. METHOD: The present paper describes a fourth study that has now been undertaken in which young people who met UHR criteria were randomized to one of three treatment groups: cognitive therapy plus risperidone (CogTher + Risp: n = 43); cognitive therapy plus placebo (CogTher + Placebo: n = 44); and supportive counselling + placebo (Supp + Placebo; n = 28). A fourth group of young people who did not agree to randomization were also followed up (monitoring: n = 78). Baseline characteristics of participants are provided. RESULTS AND CONCLUSION: The present study improves on the previous studies because treatment was provided for 12 months and the independent contributions of psychological and pharmacological treatments in preventing transition to psychosis in the UHR cohort and on levels of psychopathology and functioning can be directly compared. Issues associated with recruitment and randomization are discussed.

New multiple matched filter: design and experimental realization

A method of making a multiple matched filter which allows the recognition of different characters in successive planes in simple conditions is proposed. The generation of the filter is based on recording on the same plate the Fourier transforms of the different patterns to be recognized, each of which is affected by different spherical phase factors because the patterns have been placed at different distances from the lens. This is proved by means of experiments with a triple filter which allows satisfactory recognition of three characters.

Low Water Stream Crossing: Design and Construction Recommendations, Decemeber 2001

Most counties have bridges that are no longer adequate, and are faced with large capital expenditure for replacement structures of the same size. In this regard, low water stream crossings (LWSCs) can provide an acceptable, low cost alternative to bridges and culverts on low volume and reduced maintenance level roads. In addition to providing a low cost option for stream crossings, LWSCs have been designed to have the additional benefit of streambed stabilization. Considerable information on the current status of LWSCs in Iowa, along with insight of needs for design assistance, was gained from a survey of county engineers that was conducted as part of this research (Appendix A). Copies of responses and analysis are included in Appendix B. This document provides guidelines for the design of LWSCs. There are three common types of LWSCs: unvented ford, vented ford with pipes, and low water bridges. Selection among these depends on stream geometry, discharge, importance of road, and budget availability. To minimize exposure to tort liability, local agencies using low water stream crossings should consider adopting reasonable selection and design criteria and certainly provide adequate warning of these structures to road users. The design recommendations included in this report for LWSCs provide guidelines and suggestions for local agency reference. Several design examples of design calculations are included in Appendix E.

Low Water Stream Crossing: Design and Construction Recommendations; A Selection and Design Guide, February 2003

Most Iowa counties maintain low volume roads with at least one bridge or culvert that is structurally deficient or obsolete. In some counties the percentage of deficient drainage structures may be as high as 62%. Replacement with structures of similar size would require large capital expenditures that many counties cannot afford. Low water stream crossings (LWSCs) may be an acceptable lowcost alternative in some cases.

Design and Performance Verifcation of Ultra-High Performance Concrete Piles for Deep Foundations Final Report, November 2008

The strategic plan for bridge engineering issued by AASHTO in 2005 identified extending the service life and optimizing structural systems of bridges in the United States as two grand challenges in bridge engineering, with the objective of producing safer bridges that have a minimum service life of 75 years and reduced maintenance cost. Material deterioration was identified as one of the primary challenges to achieving the objective of extended life. In substructural applications (e.g., deep foundations), construction materials such as timber, steel, and concrete are subjected to deterioration due to environmental impacts. Using innovative and new materials for foundation applications makes the AASHTO objective of 75 years service life achievable. Ultra High Performance Concrete (UHPC) with compressive strength of 180 MPa (26,000 psi) and excellent durability has been used in superstructure applications but not in geotechnical and foundation applications. This study explores the use of precast, prestressed UHPC piles in future foundations of bridges and other structures. An H-shaped UHPC section, which is 10-in. (250-mm) deep with weight similar to that of an HP10×57 steel pile, was designed to improve constructability and reduce cost. In this project, instrumented UHPC piles were cast and laboratory and field tests were conducted. Laboratory tests were used to verify the moment-curvature response of UHPC pile section. In the field, two UHPC piles have been successfully driven in glacial till clay soil and load tested under vertical and lateral loads. This report provides a complete set of results for the field investigation conducted on UHPC H-shaped piles. Test results, durability, drivability, and other material advantages over normal concrete and steel indicate that UHPC piles are a viable alternative to achieve the goals of AASHTO strategic plan.

Design and Construction in Fair Housing: Enforcement, Timeless and Practical Suggestion, Spring 2010

In addition to the Fair Housing Act of 1968, other legislation has expanded protection from discrimination for individuals with disabilities, including the Rehabilitation Act of 1973 and the Americans with Disabilities Act of 1990. Notably, the Fair Housing Amendments Act (FHAA), signed into law by Ronald Reagan in 1988, expanded equal housing protection to individuals with disabilities. The legislative history behind the 1988 Amendments notes that one aim of the law was to address both purposeful discrimination as well as what is sometimes unintentional discrimination caused by the design and construction of inaccessible housing.

Bacterial sensors: synthetic design and application principles

Bacterial reporters are live, genetically engineered cells with promising application in bioanalytics. They contain genetic circuitry to produce a cellular sensing element, which detects the target compound and relays the detection to specific synthesis of so-called reporter proteins (the presence or activity of which is easy to quantify). Bioassays with bacterial reporters are a useful complement to chemical analytics because they measure biological responses rather than total chemical concentrations. Simple bacterial reporter assays may also replace more costly chemical methods as a first line sample analysis technique. Recent promising developments integrate bacterial reporter cells with microsystems to produce bacterial biosensors. This lecture presents an in-depth treatment of the synthetic biological design principles of bacterial reporters, the engineering of which started as simple recombinant DNA puzzles, but has now become a more rational approach of choosing and combining sensing, controlling and reporting DNA 'parts'. Several examples of existing bacterial reporter designs and their genetic circuitry will be illustrated. Besides the design principles, the lecture also focuses on the application principles of bacterial reporter assays. A variety of assay formats will be illustrated, and principles of quantification will be dealt with. In addition to this discussion, substantial reference material is supplied in various Annexes.

Development of Performance Properties of Ternary Mixtures and Concrete Pavement Mixture Design and Analysis (MDA): Effect of Paste Quality on Fresh and Hardened Properties of Ternary Mixtures, TPF-5(117), 2012

The purpose of this study was to investigate the effect of cement paste quality on the concrete performance, particularly fresh properties, by changing the water-to-cementitious materials ratio (w/cm), type and dosage of supplementary cementitious materials (SCM), and airvoid system in binary and ternary mixtures. In this experimental program, a total matrix of 54 mixtures with w/cm of 0.40 and 0.45; target air content of 2%, 4%, and 8%; a fixed cementitious content of 600 pounds per cubic yard (pcy), and the incorporation of three types of SCMs at different dosages was prepared. The fine aggregate-to- total aggregate ratio was fixed at 0.42. Workability, rheology, air-void system, setting time, strength, Wenner Probe surface resistivity, and shrinkage were determined. The effects of paste variables on workability are more marked at the higher w/cm. The compressive strength is strongly influenced by the paste quality, dominated by w/cm and air content. Surface resistivity is improved by inclusion of Class F fly ash and slag cement, especially at later ages. Ternary mixtures performed in accordance with their ingredients. The data collected will be used to develop models that will be part of an innovative mix proportioning procedure.

Concrete Pavement Mixture Design and Analysis (MDA) Guide Specification for Highway Concrete Pavements: Commentary, TPF-5(205), 2012

This guide specification and commentary for concrete pavements presents current state-of-the art thinking with respect to materials and mixture selection, proportioning, and acceptance. This document takes into account the different environments, practices, and materials in use across the United States and allows optional inputs for local application. The following concrete pavement types are considered: jointed plain concrete pavement, the most commonly used pavement type and may be doweled or non-doweled at transverse joints; and continuously reinforced concrete pavement, typically constructed without any transverse joints, typically used for locations with high truck traffic loads and/or poor support conditions.

Concrete Pavement Mixture Design and Analysis (MDA) Guide Specification for Highway Concrete Pavements, TPF-5(205), 2012

A guide specification and commentary have been prepared that lay out current state-of-the art thinking with respect to materials and mixture selection, proportioning, and acceptance. These documents take into account the different environments, practices, and materials in use across the US and allow optional inputs for local application.

Concrete Pavement Mixture Design and Analysis (MDA): Effect of Aggregate Systems on Concrete Properties, TPF-5(205), 2012

For years, specifications have focused on the water to cement ratio (w/cm) and strength of concrete, despite the majority of the volume of a concrete mixture consisting of aggregate. An aggregate distribution of roughly 60% coarse aggregate and 40% fine aggregate, regardless of gradation and availability of aggregates, has been used as the norm for a concrete pavement mixture. Efforts to reduce the costs and improve sustainability of concrete mixtures have pushed owners to pay closer attention to mixtures with a well-graded aggregate particle distribution. In general, workability has many different variables that are independent of gradation, such as paste volume and viscosity, aggregate’s shape, and texture. A better understanding of how the properties of aggregates affect the workability of concrete is needed. The effects of aggregate characteristics on concrete properties, such as ability to be vibrated, strength, and resistivity, were investigated using mixtures in which the paste content and the w/cm were held constant. The results showed the different aggregate proportions, the maximum nominal aggregate sizes, and combinations of different aggregates all had an impact on the performance in the strength, slump, and box test.