Improved estimation of the covariance matrix of stock returns with an application to portofolio selection

This paper proposes to estimate the covariance matrix of stock returnsby an optimally weighted average of two existing estimators: the samplecovariance matrix and single-index covariance matrix. This method isgenerally known as shrinkage, and it is standard in decision theory andin empirical Bayesian statistics. Our shrinkage estimator can be seenas a way to account for extra-market covariance without having to specifyan arbitrary multi-factor structure. For NYSE and AMEX stock returns from1972 to 1995, it can be used to select portfolios with significantly lowerout-of-sample variance than a set of existing estimators, includingmulti-factor models.

Optimal contracts, adverse selection and social preferences: An experiment

It has long been standard in agency theory to search for incentive-compatible mechanisms on the assumption that people care only about their own material wealth. However, this assumption is clearly refuted by numerous experiments, and we feel that it may be useful to consider nonpecuniary utility in mechanism design and contract theory. Accordingly, we devise an experiment to explore optimal contracts in an adverse-selection context. A principal proposes one of three contract menus, each of which offers a choice of two incentive-compatible contracts, to two agents whose types are unknown to the principal. The agents know the set of possible menus, and choose to either accept one of the two contracts offered in the proposed menu or to reject the menu altogether; a rejection by either agent leads to lower (and equal) reservation payoffs for all parties. While all three possible menus favor the principal, they do so to varying degrees. We observe numerous rejections of the more lopsided menus, and approach an equilibrium where one of the more equitable contract menus (which one depends on the reservation payoffs) is proposed and agents accept a contract, selecting actions according to their types. Behavior is largely consistent with all recent models of social preferences, strongly suggesting there is value in considering nonpecuniary utility in agency theory.

KIT mutations and dose selection for imatinib in patients with advanced gastrointestinal stromal tumours.

A recent randomized EORTC phase III trial, comparing two doses of imatinib in patients with advanced gastrointestinal stromal tumours (GISTs), reported dose dependency for progression-free survival. The current analysis of that study aimed to assess if tumour mutational status correlates with clinical response to imatinib. Pre-treatment samples of GISTs from 377 patients enrolled in phase III study were analyzed for mutations of KIT or PDGFRA by combination of D-HPLC and direct sequencing of tumour genomic DNA. Mutation types were correlated with patients' survival data. The presence of exon 9-activating mutations in KIT was the strongest adverse prognostic factor for response to imatinib, increasing the relative risk of progression by 171% (P<0.0001) and the relative risk of death by 190% (P<0.0001) when compared with KIT exon 11 mutants. Similarly, the relative risk of progression was increased by 108% (P<0.0001) and the relative risk of death by 76% (P=0.028) in patients without detectable KIT or PDGFRA mutations. In patients whose tumours expressed an exon 9 KIT oncoprotein, treatment with the high-dose regimen resulted in a significantly superior progression-free survival (P=0.0013), with a reduction of the relative risk of 61%. We conclude that tumour genotype is of major prognostic significance for progression-free survival and overall survival in patients treated with imatinib for advanced GISTs. Our findings suggest the need for differential treatment of patients with GISTs, with KIT exon 9 mutant patients benefiting the most from the 800 mg daily dose of the drug.

Adaptive model selection using empirical complexities

Given $n$ independent replicates of a jointly distributed pair $(X,Y)\in {\cal R}^d \times {\cal R}$, we wish to select from a fixed sequence of model classes ${\cal F}_1, {\cal F}_2, \ldots$ a deterministic prediction rule $f: {\cal R}^d \to {\cal R}$ whose risk is small. We investigate the possibility of empirically assessingthe {\em complexity} of each model class, that is, the actual difficulty of the estimation problem within each class. The estimated complexities are in turn used to define an adaptive model selection procedure, which is based on complexity penalized empirical risk.The available data are divided into two parts. The first is used to form an empirical cover of each model class, and the second is used to select a candidate rule from each cover based on empirical risk. The covering radii are determined empirically to optimize a tight upper bound on the estimation error. An estimate is chosen from the list of candidates in order to minimize the sum of class complexity and empirical risk. A distinguishing feature of the approach is that the complexity of each model class is assessed empirically, based on the size of its empirical cover.Finite sample performance bounds are established for the estimates, and these bounds are applied to several non-parametric estimation problems. The estimates are shown to achieve a favorable tradeoff between approximation and estimation error, and to perform as well as if the distribution-dependent complexities of the model classes were known beforehand. In addition, it is shown that the estimate can be consistent,and even possess near optimal rates of convergence, when each model class has an infinite VC or pseudo dimension.For regression estimation with squared loss we modify our estimate to achieve a faster rate of convergence.

Revealed preference and indifferent selection

It is shown that preferences can be constructed from observed choice behavior in a way that is robust to indifferent selection (i.e., the agent is indifferent between two alternatives but, nevertheless, is only observed selecting one of them). More precisely, a suggestion by Savage (1954) to reveal indifferent selection by considering small monetary perturbations of alternatives is formalized and generalized to a purely topological framework: references over an arbitrary topological space can be uniquely derived from observed behavior under the assumptions that they are continuous and nonsatiated and that a strictly preferred alternative is always chosen, and indifferent selection is then characterized by discontinuity in choice behavior. Two particular cases are then analyzed: monotonic preferences over a partially ordered set, and preferences representable by a continuous pseudo-utility function.

Comparison of human chromosome 21 conserved nongenic sequences (CNGs) with the mouse and dog genomes shows that their selective constraint is independent of their genic environment.

The analysis of conservation between the human and mouse genomes resulted in the identification of a large number of conserved nongenic sequences (CNGs). The functional significance of this nongenic conservation remains unknown, however. The availability of the sequence of a third mammalian genome, the dog, allows for a large-scale analysis of evolutionary attributes of CNGs in mammals. We have aligned 1638 previously identified CNGs and 976 conserved exons (CODs) from human chromosome 21 (Hsa21) with their orthologous sequences in mouse and dog. Attributes of selective constraint, such as sequence conservation, clustering, and direction of substitutions were compared between CNGs and CODs, showing a clear distinction between the two classes. We subsequently performed a chromosome-wide analysis of CNGs by correlating selective constraint metrics with their position on the chromosome and relative to their distance from genes. We found that CNGs appear to be randomly arranged in intergenic regions, with no bias to be closer or farther from genes. Moreover, conservation and clustering of substitutions of CNGs appear to be completely independent of their distance from genes. These results suggest that the majority of CNGs are not typical of previously described regulatory elements in terms of their location. We propose models for a global role of CNGs in genome function and regulation, through long-distance cis or trans chromosomal interactions.

International capital flows and credit market imperfections: A tale of two frictions

The financial crisis of 2007-08 has underscored the importance of adverse selection in financialmarkets. This friction has been mostly neglected by macroeconomic models of financialimperfections, however, which have focused almost exclusively on the effects of limited pledgeability.In this paper, we fill this gap by developing a standard growth model with adverseselection. Our main results are that, by fostering unproductive investment, adverse selection:(i) leads to an increase in the economy s equilibrium interest rate, and; (ii) it generates a negativewedge between the marginal return to investment and the equilibrium interest rate. Underfinancial integration, we show how this translates into excessive capital inflows and endogenouscycles. We also extend our model to the more general case in which adverse selection and limitedpledgeability coexist. We conclude that both frictions complement one another and show thatlimited pledgeability exacerbates the effects of adverse selection.

Model selection and error estimation

We study model selection strategies based on penalized empirical loss minimization. We point out a tight relationship between error estimation and data-based complexity penalization: any good error estimate may be converted into a data-based penalty function and the performance of the estimate is governed by the quality of the error estimate. We consider several penalty functions, involving error estimates on independent test data, empirical {\sc vc} dimension, empirical {\sc vc} entropy, andmargin-based quantities. We also consider the maximal difference between the error on the first half of the training data and the second half, and the expected maximal discrepancy, a closely related capacity estimate that can be calculated by Monte Carlo integration. Maximal discrepancy penalty functions are appealing for pattern classification problems, since their computation is equivalent to empirical risk minimization over the training data with some labels flipped.

Low density polyethylene (LDPE) passive samplers for the investigation of polychlorinated biphenyl (PCB) point sources in rivers

This study aims to provide a passive sampling approach which can be routinely used to investigate polychlorinated biphenyl (PCB) sources in rivers. The approach consists of deploying low density polyethylene (LDPE) strips downstream and upstream of potential PCB sources as well as in their water discharges. Concentrations of indicator PCBs (iPCBs) absorbed in samplers (Cs) from upstream and downstream sites are compared with each other to reveal increases of PCB levels. Cs measured in water discharges are used to determine if released amounts of PCBs are compatible with increases revealed in the river. As water velocity can greatly vary along a river stretch and influences the uptake at each site in a different way, differences in velocity have to be taken into account to correctly interpret Cs. LDPE strips were exposed to velocities between 1.6 and 37 cm s−1 using a channel system built in the field. Relationships between velocity and Cs were established for each iPCB to determine the expected change in Cs due to velocity variations. For PCBs 28 and 52, this change does not exceed a factor 2 for velocity variations in the range from 1.6 to 100 cm s−1 (extrapolated data above 37 cm s−1). For PCBs 101, 138, 153 and 180, this change only exceeds a factor 2 in the case of large velocity variations. The approach was applied in the Swiss river Venoge to first conduct a primary investigation of potential PCB sources and then conduct thorough investigations of two suspected sources.

1st radiometric dating of a paleontologically dated Bathonian level from Georgia (USSR) - Use of the cathodoluminescence for selection of suitable plagioclases

Jurassic volcanic formations interlayered with (ammonite-bearing) sediments are common in the Caucasus area; this situation is of interest for the numerical calibration of the poorly documented Jurassic portion of the time scale. However, following petrographic study on thin sections no whole-rocks can be considered reliable geochronometers due to subsequent alteration; from about 20 samples, two were selected for plagioclase dating; one (V134) is probably early Kimmeridgian in age; the other (V136) is probably located in the Lower Bathonian stage according to diagnostic ammonites. Cathodoluminescence (CTL) study has shown that sample V136 was similar to usual volcanic feldspars (blue to green colour); however, the lack of CTL of the V134 plagioclase is a character common to diagenetic feldspars; consequently, in spite of a good optical preservation, this geo-chronometer cannot give an age representative of the time of emplacement of the lava flow. We have combined CTL observation with microprobe analysis in order to document the poorly known CTL behaviour of volcanic feldspars; cations Ti4+ and Fe2+ play a major role in the CTL colour of plagioclases and are able to document the growing history of these feldspars ; phenocrysts are initially rich in Fe2+ (core of the crystals, green in colour), then richer in Ti toward the exterior; microcrysts are even richer in Ti (blue to bright blue). We have also observed that natural CTL colour was modified resulting from acid ``cleaning'' of the separated feldspars : the initial blue or green colour tends to change to yellow or violet, respectively, after acid treatment probably due to oxydation of Fe2+ toward Fe3+. X-ray and microprobe analyses both indicated that plagioclases from sample V134 was near the sodic end member (albite) suggesting a diagenetic origin in this andesitic basalt; In contrast, sample V136 contains a calcic plagioclase of common composition for a doleritic basalt. The K-Ar conventional technique was applied as a preliminary tool for radiometric analysis. The Kimmeridgian Na-plagioclase sample gave a ``rejuvenated'' (85 Ma) apparent age which confirms a late genesis for the separated plagioclase phase; this interpretation is based on CTL observation, X-ray analysis, and microprobe analysis ; these techniques are able to distinguish samples which have been submitted to diagenetic alteration from those which have not. An age consistent with the stratigraphic location has been obtained from sample V136. This age of 161 +/- 3 (2-sigma) Ma, is the first one available from a sample palaeontologically located with reasonable precision within the mid Jurassic time.

On the role of non-equilibrium focal points as coordination devices

Considering a pure coordination game with a large number of equivalentequilibria, we argue, first, that a focal point that is itself not a Nash equilibriumand is Pareto dominated by all Nash equilibria, may attract the players'choices. Second, we argue that such a non-equilibrium focal point may act asan equilibrium selection device that the players use to coordinate on a closelyrelated small subset of Nash equilibria. We present theoretical as well asexperimental support for these two new roles of focal points as coordinationdevices.

TCR-alpha CDR3 loop audition regulates positive selection.

How positive selection molds the T cell repertoire has been difficult to examine. In this study, we use TCR-beta-transgenic mice in which MHC shapes TCR-alpha use. Differential AV segment use is directly related to the constraints placed on the composition of the CDR3 loops. Where these constraints are low, efficient selection of alphabeta pairs follows. This mode of selection preferentially uses favored AV-AJ rearrangements and promotes diversity. Increased constraint on the alpha CDR3 loops leads to inefficient selection associated with uncommon recombination events and limited diversity. Further, the two modes of selection favor alternate sets of AJ segments. We discuss the relevance of these findings to the imprint of self-MHC restriction and peripheral T cell activation.

EEG alpha activity reflects motor preparation rather than the mode of action selection

Alpha-band activity (8-13 Hz) is not only suppressed by sensory stimulation and movements, but also modulated by attention, working memory and mental tasks, and could be sensitive to higher motor control functions. The aim of the present study was to examine alpha oscillatory activity during the preparation of simple left or right finger movements, contrasting the external and internal mode of action selection. Three preparation conditions were examined using a precueing paradigm with S1 as the preparatory and S2 as the imperative cue: Full, laterality instructed by S1; Free, laterality freely selected and None, laterality instructed by S2. Time-frequency (TF) analysis was performed in the alpha frequency range during the S1-S2 interval, and alpha motor-related amplitude asymmetries (MRAA) were also calculated. The significant MRAA during the Full and Free conditions indicated effective external and internal motor response preparation. In the absence of specific motor preparation (None), a posterior alpha event-related desynchronization (ERD) dominated, reflecting the main engagement of attentional resources. In Full and Free motor preparation, posterior alpha ERD was accompanied by a midparietal alpha event-related synchronization (ERS), suggesting a concomitant inhibition of task-irrelevant visual activity. In both Full and Free motor preparation, analysis of alpha power according to MRAA amplitude revealed two types of functional activation patterns: (1) a motor alpha pattern, with predominantly midparietal alpha ERS and large MRAA corresponding to lateralized motor activation/visual inhibition and (2) an attentional alpha pattern, with dominating right posterior alpha ERD and small MRAA reflecting visuospatial attention. The present results suggest that alpha oscillatory patterns do not resolve the selection mode of action, but rather distinguish separate functional strategies of motor preparation.

The stationary distribution of a continuously varying strategy in a class-structured population under mutation-selection-drift balance.

Many traits and/or strategies expressed by organisms are quantitative phenotypes. Because populations are of finite size and genomes are subject to mutations, these continuously varying phenotypes are under the joint pressure of mutation, natural selection and random genetic drift. This article derives the stationary distribution for such a phenotype under a mutation-selection-drift balance in a class-structured population allowing for demographically varying class sizes and/or changing environmental conditions. The salient feature of the stationary distribution is that it can be entirely characterized in terms of the average size of the gene pool and Hamilton's inclusive fitness effect. The exploration of the phenotypic space varies exponentially with the cumulative inclusive fitness effect over state space, which determines an adaptive landscape. The peaks of the landscapes are those phenotypes that are candidate evolutionary stable strategies and can be determined by standard phenotypic selection gradient methods (e.g. evolutionary game theory, kin selection theory, adaptive dynamics). The curvature of the stationary distribution provides a measure of the stability by convergence of candidate evolutionary stable strategies, and it is evaluated explicitly for two biological scenarios: first, a coordination game, which illustrates that, for a multipeaked adaptive landscape, stochastically stable strategies can be singled out by letting the size of the gene pool grow large; second, a sex-allocation game for diploids and haplo-diploids, which suggests that the equilibrium sex ratio follows a Beta distribution with parameters depending on the features of the genetic system.

Postglacial recolonization at a snail's pace (Trochulus villosus): confronting competing refugia hypotheses using model selection.

The localization of Last Glacial Maximum (LGM) refugia is crucial information to understand a species' history and predict its reaction to future climate changes. However, many phylogeographical studies often lack sampling designs intensive enough to precisely localize these refugia. The hairy land snail Trochulus villosus has a small range centred on Switzerland, which could be intensively covered by sampling 455 individuals from 52 populations. Based on mitochondrial DNA sequences (COI and 16S), we identified two divergent lineages with distinct geographical distributions. Bayesian skyline plots suggested that both lineages expanded at the end of the LGM. To find where the origin populations were located, we applied the principles of ancestral character reconstruction and identified a candidate refugium for each mtDNA lineage: the French Jura and Central Switzerland, both ice-free during the LGM. Additional refugia, however, could not be excluded, as suggested by the microsatellite analysis of a population subset. Modelling the LGM niche of T. villosus, we showed that suitable climatic conditions were expected in the inferred refugia, but potentially also in the nunataks of the alpine ice shield. In a model selection approach, we compared several alternative recolonization scenarios by estimating the Akaike information criterion for their respective maximum-likelihood migration rates. The 'two refugia' scenario received by far the best support given the distribution of genetic diversity in T. villosus populations. Provided that fine-scale sampling designs and various analytical approaches are combined, it is possible to refine our necessary understanding of species responses to environmental changes.