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.

The Timing of Asset Trade and Optimal Policy in Dynamic Open Economies

Using a standard open economy DSGE model, it is shown that the timing of asset trade relative to policy decisions has a potentially important impact on the welfare evaluation of monetary policy at the individual country level. If asset trade in the initial period takes place before the announcement of policy, a national policymaker can choose a policy rule which reduces the work effort of households in the policymaker’s country in the knowledge that consumption is fully insured by optimally chosen international portfolio positions. But if asset trade takes place after the policy announcement, this insurance is absent and households in the policymaker’s country bear the full consumption consequences of the chosen policy rule. The welfare incentives faced by national policymakers are very different between the two cases. Numerical examples confirm that asset market timing has a significant impact on the optimal policy rule.

Microstructure Order Flow: Statistical and Economic Evaluation of Nonlinear Forecasts

In this paper we propose a novel empirical extension of the standard market microstructure order flow model. The main idea is that heterogeneity of beliefs in the foreign exchange market can cause model instability and such instability has not been fully accounted for in the existing empirical literature. We investigate this issue using two di¤erent data sets and focusing on out- of-sample forecasts. Forecasting power is measured using standard statistical tests and, additionally, using an alternative approach based on measuring the economic value of forecasts after building a portfolio of assets. We nd there is a substantial economic value on conditioning on the proposed models.

Nominal Stability and Financial Globalization

Over the past four decades, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This appears to be a robust prediction of open economy macro models with endogenous portfolio choice. It holds across different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions.

Behavior of endogenous tumor-associated macrophages assessed in vivo using a functionalized nanoparticle.

Tumor-associated macrophages (TAMs) invade the tumor stroma in many cancers, yet their role is incompletely understood. To visualize and better understand these critical cells in tumor progression, we screened a portfolio of rationally selected, injectable agents to image endogenous TAMs ubiquitously in three different cancer models (colon carcinoma, lung adenocarcinoma, and soft tissue sarcoma). AMTA680, a functionally derivatized magneto-fluorescent nanoparticle, labeled a subset of myeloid cells with an "M2" macrophage phenotype, whereas other neighboring cells, including tumor cells and a variety of other leukocytes, remained unlabeled. We further show that AMTA680-labeled endogenous TAMs are not altered and can be tracked noninvasively at different resolutions and using various imaging modalities, e.g., fluorescence molecular tomography, magnetic resonance imaging, and multiphoton and confocal intravital microscopy. Quantitative assessment of TAM distribution and activity in vivo identified that these cells cluster in delimited foci within tumors, show relatively low motility, and extend cytoplasmic protrusions for prolonged physical interactions with neighboring tumor cells. Noninvasive imaging can also be used to monitor TAM-depleting regimen quantitatively. Thus, AMTA680 or related cell-targeting agents represent appropriate injectable vehicles for in vivo analysis of the tumor microenvironment.

The effects of teacher talk on students’ oral productions

The present study is a brief personal enquiry into the teaching and learning of EFL in the classroom with an orientation to action and personal professional development. It focuses on teacher talk, making special emphasis on questions, as well as on students’ resulting oral productions. The research contains samples of empirical data, which include their interpretations in the light of relevant research literature, and a more personal overall reflection of the teaching practice. Both the analysis and the reflections derive to a large extent from the self-observation paper 1 (SO1) and the Practicum portfolio (PP) developed within the TED Masters Degree practicum stages

Inclusió de les TIC en el portafoli de l'estudiant per a l'ensenyament dels mètodes numèrics

La finalitat d’aquest projecte ha estat la millora de la formació global dels estudiants. Concretament, mitjançant la creació d’un portafolis que contingui les diferents activitats que ha realitzat l’estudiant al llarg del curs es pretén potenciar tant les competències específiques com les competències transversals dels estudiants. Concretament, aquest objectiu s'ha assolit mitjançant el disseny i el desenvolupament de: 1. nou material docent corresponent a la presentació dels continguts de l’assignatura (apunts, presentacions, animacions,... ) amb el que s'ha pretès promoure el treball individual i la capacitat d’autoaprenentatge dels estudiants. 2. sesions dirigits que es realitzen en aules informàtiques amb el que s'ha volgut incrementar la motivació i desenvolupar un esperit crític dels estudiants 3. treballs tutelats que els estudiants realitzaran en grups, posteriorments pesentaran a la resta de companys i que finalment condueixen a la redacció d’un informe final. D'aquesta manera s'ha pretès desenvolupar les competències transversals dels estudiants

Grup de treball en el portafoli de l'estudiant (GTPoE)

El projecte del grup de treball en el portafoli d’aprenentatge de l'estudiant de la UPC (GtPoE) ha tingut una durada d'un any i s'ha realitzat a la Universitat Politècnica de Catalunya. Els objectius del projecte, que majoritàriament s’han assolit, han estat essencialment: (1) formació d'un grup d’interès per impulsar el portafoli i portafoli electrònic com a eines d'avaluació vàlides en el context nou de l'EEES, format per professors de la UPC i d’altres universitats que s’han volgut incorporar; (2) posta a punt i ús d’una plataforma intranet i web per a la coordinació del grup i exposició de materials; (3) realització de seminaris específics amb ponents expert en aquesta matèria per assolir les bases de la metodologia; (4) assaig per part de professors del grup de treball, d’experiències del portafoli de l’estudiant en assignatures tant obligatories com optatives en diversos centres de la UPC, i la introducció del portafoli de la carrera (o carpeta de competències) en l’EPSC; (5) adquirir documentació i referències bibliogràfiques sobre aquesta eina del portafoli i altres tècniques d’innovació docent; i (6), participar en congressos i jornades per explicar els resultats del projecte. Actualment, al final d’aquest projecte, el grup té 26 membres i la voluntat de continuar desenvolupant la tasca d’inserció del portafoli en els nous plans d’estudis. Així com també es treballa coordinadament amb els altres grups d’interès que s’han format al voltant de l’ICE de la UPC a l'entorn de la innovació docent, al mateix temps que es participa en les activitats que desenvolupa la RED E-Portfolio a nivell estatal amb objectius similars coordinada per professors de la UOC.

Ampliació i extensió en l'ús del portafolis digital en l'avaluació de l'alumnat

El treball realitzat amb l’ajuda MQD2006 està relacionat amb l’ús de portafolis electrònics en un context universitari. Els objectius que ens havíem traçat, eren: 1)Dissenyar una versió beta del portafolis digital desenvolupat adhoc pel grup 2)Implementar una metodologia avaluativa basada en el portafolis digital desenvolupat 3)Generar portafolis digitals com a model de bones pràctiques d’avaluació de l’alumnat 4)Recollir dades sobre el seu funcionament en relació a l’alumnat A més dels anteriors objectius, relacionats amb els aspectes pedagògics freuit de la implementació i ús dels portafolis digitals, hi ha dos objectius relacionats amb aspectes didàctics. Aquests són: 5) Anàlisi dels canvis en la metodologia didàctica i en els continguts curriculars 6) Anàlisi de criteris de sostenibilitat de la utilització continuada del portafolis digital. Almenys 5 d’aquests 6 objectius s’han complert de manera completa, i un (el nombre cinc) ha quedat solament esbossat. Per altra banda, alguns resultats inesperats s’han produït en aquests dos anys i es poden afegir a aquesta llista inicial: 7) Expansió i difusió de l’experiència cap a altres universitats. 8) Possibilitat de plantejar un projecte d’investigació bàsica sobre les conseqüències de l’ús de portafolis en la docència universitària basada en l’EEES. La Memòria seguirà de prop aquests objectius, si bé es distribuiran d’una manera diferent. Com a resultats i conclusions hem pogut veure que l’eina ha estat ben valorada en quant a la metodologia d’ús proposada, en quant al propi seguiment de l’aprenentatge i per una autoavaluació continuada. Hem vist una millora en les reflexions dels estudiants fent servir un diàleg on-line entre professor-estudiant. D’altra banda, hem detectat que es requereix millorar la seva usabilitat, un ús continuat més llarg i algunes recomanacions encarades al treball docent del professorat i no tant de l’eina.

A logistic regression approach to estimating customer profit loss due to lapses in insurance

This article focuses on business risk management in the insurance industry. A methodology for estimating the profit loss caused by each customer in the portfolio due to policy cancellation is proposed. Using data from a European insurance company, customer behaviour over time is analyzed in order to estimate the probability of policy cancelation and the resulting potential profit loss due to cancellation. Customers may have up to two different lines of business contracts: motor insurance and other diverse insurance (such as, home contents, life or accident insurance). Implications for understanding customer cancellation behaviour as the core of business risk management are outlined.

Credit risk contributions under the Vasicek one-factor model: a fast wavelet expansion approximation

To measure the contribution of individual transactions inside the total risk of a credit portfolio is a major issue in financial institutions. VaR Contributions (VaRC) and Expected Shortfall Contributions (ESC) have become two popular ways of quantifying the risks. However, the usual Monte Carlo (MC) approach is known to be a very time consuming method for computing these risk contributions. In this paper we consider the Wavelet Approximation (WA) method for Value at Risk (VaR) computation presented in [Mas10] in order to calculate the Expected Shortfall (ES) and the risk contributions under the Vasicek one-factor model framework. We decompose the VaR and the ES as a sum of sensitivities representing the marginal impact on the total portfolio risk. Moreover, we present technical improvements in the Wavelet Approximation (WA) that considerably reduce the computational effort in the approximation while, at the same time, the accuracy increases.

How to use the standard model with own data?

In this work discuss the use of the standard model for the calculation of the solvency capital requirement (SCR) when the company aims to use the specific parameters of the model on the basis of the experience of its portfolio. In particular, this analysis focuses on the formula presented in the latest quantitative impact study (2010 CEIOPS) for non-life underwriting premium and reserve risk. One of the keys of the standard model for premium and reserves risk is the correlation matrix between lines of business. In this work we present how the correlation matrix between lines of business could be estimated from a quantitative perspective, as well as the possibility of using a credibility model for the estimation of the matrix of correlation between lines of business that merge qualitative and quantitative perspective.

Anaesthetics, Pain Relief and Critical Care Follow Up (PDF 797 KB)

In 2003/2004 the Department of Health, Social Services and Public Safety commissioned a value for money follow-up audit of Anaesthetics, Pain Relief and Critical Care (APRCC) services at twelve Trusts and covering fourteen hospital sites. The original study had reported in 1999/2000. Detailed follow-up reports, together with action plans have been agreed locally with Trusts. The objectives of the follow-up review were to: • Ascertain the progress made in implementing recommendations from the original study; • Provide data to compare performance across Trusts in areas such as: - Pre-operative assessments; - Organisation of post-operative pain relief; - Organisation of chronic pain services; - Levels of admissions to critical care units; - Occupancy in critical care units; and åÊ • Assess the extent of progress made by Trusts in the implementation of the Chief Medical Officer’s (CMO) recommendations from ‘Facing the Future –Building on the Lessons of Winter 1999/2000’. To enable comparisons across Trusts, data was collected for the financial year 2002/2003. In addition, relevant findings from the Audit Commission’s Acute Hospitals Portfolio have also been included. The Acute Hospital Portfolio is a collection of reviews that are undertaken at acute and specialist Trusts. They focus on key service areas and are reported along the key performance criteria of patient experience, efficiency and capacity. åÊ

Monitorización de la temperatura de un CPD mediante una red de sensores inalámbricos

Con este proyecto se pretende que una organización sea más consciente del estado de sus máquinas y anticiparse a una situación de pérdida de información, parada de servicios o parada por sobrecalentamiento de servidores.

Capturing and Organizing Prior Student Learning with the OCW Backpack

The purpose of this paper is to present an approach for students to have non-traditional learning assessed for credit and introduce a tool that facilitates this process. The OCW Backpack system can connect self-learners with KNEXT assessment services to obtain college credit for prior learning. An ex post facto study based on historical data collected over the past two years at Kaplan University (KU) is presented to validate the portfolio assessment process. Cumulative GPA was compared for students who received experiential credit for learning derived from personal or professional experience with a matched sample of students with no experiential learning credits. The study found that students who received experiential credits perform better than the matched sample students on GPA. The findings validate the KU portfolio assessment process. Additionally, the results support the capability of the OCW Backpack to capture the critical information necessary to evaluate non-traditional learning for university credit.