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.

N2O emissions from a cultivated mollisol: optimal time of day for sampling and the role of soil temperature

The correct use of closed field chambers to determine N2O emissions requires defining the time of day that best represents the daily mean N2O flux. A short-term field experiment was carried out on a Mollisol soil, on which annual crops were grown under no-till management in the Pampa Ondulada of Argentina. The N2O emission rates were measured every 3 h for three consecutive days. Fluxes ranged from 62.58 to 145.99 ∝g N-N2O m-2 h-1 (average of five field chambers) and were negatively related (R² = 0.34, p < 0.01) to topsoil temperature (14 - 20 ºC). N2O emission rates measured between 9:00 and 12:00 am presented a high relationship to daily mean N2O flux (R² = 0.87, p < 0.01), showing that, in the study region, sampling in the mornings is preferable for GHG.

Association between C-reactive protein and adiposity in women.

Context: The link between C-reactive protein (CRP) and adiposity deserves to be further explored considering the controversial diabetogenic role of CRP. Objective: We explored the potential causal role of CRP on measures of adiposity. Design: We used a Mendelian randomization approach with the CRP and LEPR genes as instrumental variables in a cross-sectional Caucasian population-based study comprising 2526 men and 2836 women. Adiposity was measured using body mass index (BMI), fat and lean mass estimated by bioelectrical impedance, and waist circumference. Results: Log-transformed CRP explained by the rs7553007 SNP tagging the CRP gene was significantly associated with BMI (regression coefficient: 1.22 [0.18;2.25], P=0.02) and fat mass (2.67 [0.65;4.68], P=0.01), but not with lean mass in women, whereas no association was found in men. Log-transformed CRP explained by the rs1805096 LEPR SNP was also positively associated, although not significantly, with BMI or fat mass. The combined CRP-LEPR instrument explained 2.24% and 0.77% of CRP variance in women and in men, respectively. Log-transformed CRP explained by this combined instrument was significantly associated with BMI (0.98 [0.32;1.63], P=0.004), fat mass (2.07 [0.79;3.34], P=0.001) and waist (2.09 [0.39;3.78], P=0.01) in women, but not in men. Conclusion: Our data suggest that CRP is causally and positively related to BMI in women, and that this is mainly due to fat mass. Results on the combined CRP-LEPR instrument suggest that leptin may play a role in the causal association between CRP and adiposity in women. Results in men were not significant.

Optimal network topologies for local search with congestion

The problem of searchability in decentralized complex networks is of great importance in computer science, economy, and sociology. We present a formalism that is able to cope simultaneously with the problem of search and the congestion effects that arise when parallel searches are performed, and we obtain expressions for the average search cost both in the presence and the absence of congestion. This formalism is used to obtain optimal network structures for a system using a local search algorithm. It is found that only two classes of networks can be optimal: starlike configurations, when the number of parallel searches is small, and homogeneous-isotropic configurations, when it is large.

Blood pressure and LDL-cholesterol targets for prevention of recurrent strokes and cognitive decline in the hypertensive patient: design of the European Society of Hypertension-Chinese Hypertension League Stroke in Hypertension Optimal Treatment randomized trial.

BACKGROUND AND OBJECTIVES: The SBP values to be achieved by antihypertensive therapy in order to maximize reduction of cardiovascular outcomes are unknown; neither is it clear whether in patients with a previous cardiovascular event, the optimal values are lower than in the low-to-moderate risk hypertensive patients, or a more cautious blood pressure (BP) reduction should be obtained. Because of the uncertainty whether 'the lower the better' or the 'J-curve' hypothesis is correct, the European Society of Hypertension and the Chinese Hypertension League have promoted a randomized trial comparing antihypertensive treatment strategies aiming at three different SBP targets in hypertensive patients with a recent stroke or transient ischaemic attack. As the optimal level of low-density lipoprotein cholesterol (LDL-C) level is also unknown in these patients, LDL-C-lowering has been included in the design. PROTOCOL DESIGN: The European Society of Hypertension-Chinese Hypertension League Stroke in Hypertension Optimal Treatment trial is a prospective multinational, randomized trial with a 3 × 2 factorial design comparing: three different SBP targets (1, <145-135; 2, <135-125; 3, <125 mmHg); two different LDL-C targets (target A, 2.8-1.8; target B, <1.8 mmol/l). The trial is to be conducted on 7500 patients aged at least 65 years (2500 in Europe, 5000 in China) with hypertension and a stroke or transient ischaemic attack 1-6 months before randomization. Antihypertensive and statin treatments will be initiated or modified using suitable registered agents chosen by the investigators, in order to maintain patients within the randomized SBP and LDL-C windows. All patients will be followed up every 3 months for BP and every 6 months for LDL-C. Ambulatory BP will be measured yearly. OUTCOMES: Primary outcome is time to stroke (fatal and non-fatal). Important secondary outcomes are: time to first major cardiovascular event; cognitive decline (Montreal Cognitive Assessment) and dementia. All major outcomes will be adjudicated by committees blind to randomized allocation. A Data and Safety Monitoring Board has open access to data and can recommend trial interruption for safety. SAMPLE SIZE CALCULATION: It has been calculated that 925 patients would reach the primary outcome after a mean 4-year follow-up, and this should provide at least 80% power to detect a 25% stroke difference between SBP targets and a 20% difference between LDL-C targets.

DSC Dispatch, June 2012, Vol. 5

A quarterly publication by the Division of Soil Conservation

Procalcitonin and C-reactive protein in pericardial fluid for postmortem diagnosis of sepsis.

The aim of this study was to investigate the presence and concentrations of procalcitonin and C-reactive protein in pericardial fluid and compare these levels to those found in the postmortem serum obtained from the femoral blood. Two groups were formed, a sepsis-related fatalities group and a control group. Postmortem native CT scans, autopsies, histology, neuropathology and toxicology as well as other postmortem biochemistry investigations were performed in all cases. Pericardial fluid procalcitonin levels were significantly different between the cases of sepsis-related fatalities and those of the control group. Postmortem serum procalcitonin levels below the detection limit were also reflected in undetectable pericardial fluid levels. Similarly, a large increase in postmortem serum procalcitonin levels was reflected in a large increase of procalcitonin pericardial fluid levels. Based on these findings, pericardial fluid could be an alternative to postmortem serum for the determination of procalcitonin levels in cases where postmortem serum is not available and measurements of procalcitonin are required to circumstantiate the pathogenesis of death.

Reactive electrophile species activate defense gene expression in Arabidopsis.

Compounds containing alpha,beta-unsaturated carbonyl groups are increasingly implicated as potent regulators of gene expression; some are powerful cytotoxins known to accumulate at the site of lesion formation in host-pathogen interactions. We used a robust measurement of photosynthetic efficiency to quantify the toxicity of a variety of lipid derivatives in Arabidopsis leaves. Small alpha,beta-unsaturated carbonyl compounds (e.g. acrolein and methyl vinyl ketone) were highly active and proved to be potent stimulators of expression of the pathogenesis-related gene HEL (PR4). These small volatile electrophiles were far more active than larger alkenal homologs like 2(E)-hexenal, and activated HEL expression in a manner independent of salicylate, ethylene, and jasmonate production/perception. Electrophile treatment massively increased the levels of unesterified cyclopentenone jasmonates, which themselves are electrophiles. Patterns of gene expression in response to electrophile treatment and in response to avirulent bacteria were compared, which revealed strikingly similar transcript profiles. The results broaden the range of known biologic effects of reactive electrophile species to include the activation of a pathogenesis-related gene (HEL) and genes involved in metabolism. Electrophiles can act as mediators of both genetic and biochemical effects on core defense signal transduction.

DSC Dispatch, September 2012, Vol. 6

A quarterly publication by the Division of Soil Conservation

Optimal perfusion computed tomographic thresholds for ischemic core and penumbra are not time dependent in the clinically relevant time window.

BACKGROUND AND PURPOSE: This study aims to determine whether perfusion computed tomographic (PCT) thresholds for delineating the ischemic core and penumbra are time dependent or time independent in patients presenting with symptoms of acute stroke. METHODS: Two hundred seventeen patients were evaluated in a retrospective, multicenter study. Patients were divided into those with either persistent occlusion or recanalization. All patients received admission PCT and follow-up imaging to determine the final ischemic core, which was then retrospectively matched to the PCT images to identify optimal thresholds for the different PCT parameters. These thresholds were assessed for significant variation over time since symptom onset. RESULTS: In the persistent occlusion group, optimal PCT parameters that did not significantly change with time included absolute mean transit time, relative mean transit time, relative cerebral blood flow, and relative cerebral blood volume when time was restricted to 15 hours after symptom onset. Conversely, the recanalization group showed no significant time variation for any PCT parameter at any time interval. In the persistent occlusion group, the optimal threshold to delineate the total ischemic area was the relative mean transit time at a threshold of 180%. In patients with recanalization, the optimal parameter to predict the ischemic core was relative cerebral blood volume at a threshold of 66%. CONCLUSIONS: Time does not influence the optimal PCT thresholds to delineate the ischemic core and penumbra in the first 15 hours after symptom onset for relative mean transit time and relative cerebral blood volume, the optimal parameters to delineate ischemic core and penumbra.

DSC Dispatch, December 2012, Vol. 7

A quarterly publication by the Division of Soil Conservation