Stochastic dominance and absolute risk aversion

In this paper we proose the infimum of the Arrow-Pratt index of absoluterisk aversion as a measure of global risk aversion of a utility function.We then show that, for any given arbitrary pair of distributions, thereexists a threshold level of global risk aversion such that all increasingconcave utility functions with at least as much global risk aversion wouldrank the two distributions in the same way. Furthermore, this thresholdlevel is sharp in the sense that, for any lower level of global riskaversion, we can find two utility functions in this class yielding oppositepreference relations for the two distributions.

The achievable region approach to the optimal control of stochastic systems

The achievable region approach seeks solutions to stochastic optimisation problems by: (i) characterising the space of all possible performances(the achievable region) of the system of interest, and (ii) optimisingthe overall system-wide performance objective over this space. This isradically different from conventional formulations based on dynamicprogramming. The approach is explained with reference to a simpletwo-class queueing system. Powerful new methodologies due to the authorsand co-workers are deployed to analyse a general multiclass queueingsystem with parallel servers and then to develop an approach to optimalload distribution across a network of interconnected stations. Finally,the approach is used for the first time to analyse a class of intensitycontrol problems.

Wheat germ cell-free expression: Two detergents with a low critical micelle concentration allow for production of soluble HCV membrane proteins.

Membrane proteins are notoriously difficult to express in a soluble form. Here, we use wheat germ cell-free expression in the presence of various detergents to produce the non-structural membrane proteins 2, 4B and 5A of the hepatitis C virus (HCV). We show that lauryl maltose neopentyl glycol (MNG-3) and dodecyl octaethylene glycol ether (C12E8) detergents can yield essentially soluble membrane proteins at detergent concentrations that do not inhibit the cell-free reaction. This finding can be explained by the low critical micelle concentration (CMC) of these detergents, which keeps the monomer concentrations low while at the same time providing the necessary excess of detergent concentration above CMC required for full target protein solubilization. We estimate that a tenfold excess of detergent micelles with respect to the protein concentration is sufficient for solubilization, a number that we propose as a guideline for detergent screening assays.

Debt and deficit fluctuations and the structure of bond markets

This paper tests for the market environment within which US fiscal policyoperates, that is we test for the incompleteness of the US government bondmarket. We document the stochastic properties of US debt and deficits andthen consider the ability of competing optimal tax models to account forthis behaviour. We show that when a government pursues an optimal taxpolicy and issues a full set of contingent claims, the value of debthas the same or less persistence than other variables in the economyand declines in response to higher deficit shocks. By contrast, ifgovernments only issue one-period risk free bonds (incomplete markets),debt shows more persistence than other variables and it increases inresponse to expenditure shocks. Maintaining the hypothesis of Ramseybehavior, US data conflicts.

Multiscale phylogeography: glacial history and autopolyploidy of Biscutella laevigata L. (Brassicaceae) in the Western Alps

Résumé Les changements climatiques du Quaternaire ont eu une influence majeure sur la distribution et l'évolution des biota septentrionaux. Les Alpes offrent un cadre spatio-temporel bien étudié pour comprendre la réactivité de la flore et le potentiel d'adaptation d'une espèce végétale face aux changements climatiques. Certaines hypothèses postulent une diversification des espèces en raison de la disparition complète de la flore des Alpes et d'un isolement important des espèces dans des refuges méridionaux durant les dernières glaciations (Tabula Rasa). Une autre hypothèse stipule le maintien de poches de résistance pour la végétation au coeur des Alpes (Nunataks). Comme de nombreuses espèces végétales présentant un grand succès écologique semblent avoir réagi aux glaciations par la multiplication de leur génome (autopolyploïdie), leur étude en milieu naturel devrait permettre de comprendre les avantages inhérents à la polyploïdie. Biscutella laevigata est un modèle emblématique de biogéographie historique, diverses études ayant montré que des populations diploïdes sont actuellement isolées dans les zones restées déglacées durant le dernier maximum glaciaire, alors que des tétraploïdes ont recolonisé l'ensemble des zones alpines mises à nu par le retrait des glaciers. Si le contexte périglaciaire semble avoir favorisé ce jeune complexe autopolyploïde, les circonstances et les avantages de cette mutation génomique ne sont pas encore clairs. Y a-t-il eu de multiples événements de polyploïdisation ? Dans quelle mesure affecte(nt)il(s) la diversité génétique et le potentiel évolutif des polyploïdes ? Les polyploïdes ont-ils une grande flexibilité génomique, favorisant une radiation adaptative, ou doivent-ils leur succès à une grande plasticité écologique ? Cette étude aborde ces questions à différentes échelles spatiales et temporelles. L'échelle régionale des Alpes occidentales permet d'aborder les facteurs distaux (aspects historiques), alors que l'échelle locale cherche à appréhender les facteurs proximaux (mécanismes évolutifs). Dans les Alpes occidentales, des populations ont été densément échantillonnées et étudiées grâce à (1) leur cytotype, (2) leur appartenance taxonomique, (3) leur habitat et (4) des marqueurs moléculaires de l'ADN chloroplastique, en vue d'établir leurs affinités évolutives. Á l'échelle locale, deux systèmes de population ont été étudiés : l'un où les populations persistent en périphérie de l'aire de distribution et l'autre au niveau du front actif de colonisation, en marge altitudinale. Les résultats à l'échelle des Alpes occidentales révèlent les sites d'intérêt (refuges glaciaires, principales barrières et voies de recolonisation) pour une espèce représentative des pelouses alpines, ainsi que pour la biodiversité régionale. Les Préalpes ont joué un rôle important dans le maintien de populations à proximité immédiate des Alpes centrales et dans l'évolution du taxon, voire de la végétation. Il est aussi démontré que l'époque glaciaire a favorisé l'autopolyploïdie polytopique et la recolonisation des Alpes occidentales par des lignées distinctes qui s'hybrident au centre des Alpes, influençant fortement leur diversité génétique et leur potentiel évolutif. L'analyse de populations locales en situations contrastées à l'aide de marqueurs AFLP montre qu'au sein d'une lignée présentant une grande expansion, la diversité génétique est façonnée par des forces évolutives différentes selon le contexte écologique et historique. Les populations persistant présentent une dispersion des gènes restreinte, engendrant une diversité génétique assez faible, mais semblent adaptées aux conditions locales de l'environnement. À l'inverse, les populations colonisant la marge altitudinale sont influencées par les effets de fondation conjugués à une importante dispersion des gènes et, si ces processus impliquent une grande diversité génétique, ils engendrent une répartition aléatoire des génotypes dans l'environnement. Les autopolyploïdes apparaissent ainsi comme capables de persister face aux changements climatiques grâce à certaines facultés d'adaptation locale et de grandes capacités à maintenir une importante diversité génétique lors de la recolonisation post-glaciaire. Summary The extreme climate changes of the Quaternary have had a major influence on species distribution and evolution. The European Alps offer a great framework to investigate flora reactivity and the adaptive potential of species under changing climate. Some hypotheses postulate diversification due to vegetation removal and important isolation in southern refugia (Tabula Rasa), while others explain phylogeographic patterns by the survival of species in favourable Nunataks within the Alps. Since numerous species have successfully reacted to past climate changes by genome multiplication (autopolyploidy), studies of such taxa in natural conditions is likely to explain the ecological success and the advantages of autopolyploidy. Early cytogeographical surveys of Biscutella laevigata have shed light on the links between autopolyploidy and glaciations by indicating that diploids are now spatially isolated in never-glaciated areas, while autotetraploids have recolonised the zones covered by glaciers- during the last glacial maximum. A periglacial context apparently favoured this young autopolyploid complex but the circumstances and the advantages of this genomic mutation remain unclear. What is the glacial history of the B. laevigata autopolyploid complex? Are there multiple events of polyploidisation? To what extent do they affect the genetic diversity and the evolutionary potential of polyploids? Is recolonisation associated with adaptive processes? How does long-term persistence affect genetic diversity? The present study addresses these questions at different spatiotemporal scales. A regional survey at the Western Alps-scale tackles distal factors (evolutionary history), while local-scale studies explore proximal factors (evolutionary mechanisms). In the Western Alps, populations have been densely sampled and studied from the (1) cytotypic, (2) morphotaxonomic, (3) habitat point of views, as well as (4) plastid DNA molecular markers, in order to infer their relationships and establish the maternal lineages phylogeography. At the local scale, populations persisting at the rear edge and populations recolonising the attitudinal margin at the leading edge have been studied by AFLPs to show how genetic diversity is shaped by different evolutionary forces across the species range. The results at the regional scale document the glacial history of a widespread species, representative of alpine meadows, in a regional area of main interest (glacial refugia, main barriers and recolonisation routes) and points out to sites of interest for regional biodiversity. The external Alps have played a major role in the maintenance of populations near the central Alps during the Last Glacial Maximum and influenced the evolution of the species, and of vegetation. Polytopic autopolyploidy in different biogeographic districts is also demonstrated. The species has had an important and rapid radiation because recolonisation took place from different refugia. The subsequent recolonisation of the Western Alps was achieved by independent lineages that are presently admixing in the central Alps. The role of the Pennic summit line is underlined as a great barrier that was permeable only through certain favourable high-altitude passes. The central Alps are thus viewed as an important crossroad where genomes with different evolutionary histories are meeting and admixing. The AFLP analysis and comparison of local populations growing in contrasted ecological and historical situations indicate that populations persisting in the external Alps present restricted gene dispersal and low genetic diversity but seem in equilibrium with their environment. On the contrary, populations colonising the attitudinal margin are mainly influenced by founder effects together with great gene dispersal and genotypes have a nearly random distribution, suggesting that recolonisation is not associated with adaptive processes. Autopolyploids that locally persist against climate changes thus seem to present adaptive ability, while those that actively recolonise the Alps are successful because of their great capacity to maintain a high genetic diversity against founder effects during recolonisation.

Beyond Smith's rule: An optimal dynamic index, rule for single machine stochastic scheduling with convex holding costs

Most research on single machine scheduling has assumedthe linearity of job holding costs, which is arguablynot appropriate in some applications. This motivates ourstudy of a model for scheduling $n$ classes of stochasticjobs on a single machine, with the objective of minimizingthe total expected holding cost (discounted or undiscounted). We allow general holding cost rates that are separable,nondecreasing and convex on the number of jobs in eachclass. We formulate the problem as a linear program overa certain greedoid polytope, and establish that it issolved optimally by a dynamic (priority) index rule,whichextends the classical Smith's rule (1956) for the linearcase. Unlike Smith's indices, defined for each class, ournew indices are defined for each extended class, consistingof a class and a number of jobs in that class, and yieldan optimal dynamic index rule: work at each time on a jobwhose current extended class has larger index. We furthershow that the indices possess a decomposition property,as they are computed separately for each class, andinterpret them in economic terms as marginal expected cost rate reductions per unit of expected processing time.We establish the results by deploying a methodology recentlyintroduced by us [J. Niño-Mora (1999). "Restless bandits,partial conservation laws, and indexability. "Forthcomingin Advances in Applied Probability Vol. 33 No. 1, 2001],based on the satisfaction by performance measures of partialconservation laws (PCL) (which extend the generalizedconservation laws of Bertsimas and Niño-Mora (1996)):PCL provide a polyhedral framework for establishing theoptimality of index policies with special structure inscheduling problems under admissible objectives, which weapply to the model of concern.

Calibration of stochastic volatility models via second order approximation: the Heston model case

Using a suitable Hull and White type formula we develop a methodology to obtain asecond order approximation to the implied volatility for very short maturities. Using thisapproximation we accurately calibrate the full set of parameters of the Heston model. Oneof the reasons that makes our calibration for short maturities so accurate is that we alsotake into account the term-structure for large maturities. We may say that calibration isnot "memoryless", in the sense that the option's behavior far away from maturity doesinfluence calibration when the option gets close to expiration. Our results provide a wayto perform a quick calibration of a closed-form approximation to vanilla options that canthen be used to price exotic derivatives. The methodology is simple, accurate, fast, andit requires a minimal computational cost.

Asymptotic robust inferences in the analysis of mean and covariance structures

Structural equation models are widely used in economic, socialand behavioral studies to analyze linear interrelationships amongvariables, some of which may be unobservable or subject to measurementerror. Alternative estimation methods that exploit different distributionalassumptions are now available. The present paper deals with issues ofasymptotic statistical inferences, such as the evaluation of standarderrors of estimates and chi--square goodness--of--fit statistics,in the general context of mean and covariance structures. The emphasisis on drawing correct statistical inferences regardless of thedistribution of the data and the method of estimation employed. A(distribution--free) consistent estimate of $\Gamma$, the matrix ofasymptotic variances of the vector of sample second--order moments,will be used to compute robust standard errors and a robust chi--squaregoodness--of--fit squares. Simple modifications of the usual estimateof $\Gamma$ will also permit correct inferences in the case of multi--stage complex samples. We will also discuss the conditions under which,regardless of the distribution of the data, one can rely on the usual(non--robust) inferential statistics. Finally, a multivariate regressionmodel with errors--in--variables will be used to illustrate, by meansof simulated data, various theoretical aspects of the paper.

Solving non-linear stochastic models by parameterizing expectations: An application to asset pricing with production

A new algorithm called the parameterized expectations approach(PEA) for solving dynamic stochastic models under rational expectationsis developed and its advantages and disadvantages are discussed. Thisalgorithm can, in principle, approximate the true equilibrium arbitrarilywell. Also, this algorithm works from the Euler equations, so that theequilibrium does not have to be cast in the form of a planner's problem.Monte--Carlo integration and the absence of grids on the state variables,cause the computation costs not to go up exponentially when the numberof state variables or the exogenous shocks in the economy increase. \\As an application we analyze an asset pricing model with endogenousproduction. We analyze its implications for time dependence of volatilityof stock returns and the term structure of interest rates. We argue thatthis model can generate hump--shaped term structures.

Option pricing under stochastic volatility and stochastic interest rate in the Spanish case

Among the underlying assumptions of the Black-Scholes option pricingmodel, those of a fixed volatility of the underlying asset and of aconstantshort-term riskless interest rate, cause the largest empirical biases. Onlyrecently has attention been paid to the simultaneous effects of thestochasticnature of both variables on the pricing of options. This paper has tried toestimate the effects of a stochastic volatility and a stochastic interestrate inthe Spanish option market. A discrete approach was used. Symmetricand asymmetricGARCH models were tried. The presence of in-the-mean and seasonalityeffectswas allowed. The stochastic processes of the MIBOR90, a Spanishshort-terminterest rate, from March 19, 1990 to May 31, 1994 and of the volatilityofthe returns of the most important Spanish stock index (IBEX-35) fromOctober1, 1987 to January 20, 1994, were estimated. These estimators wereused onpricing Call options on the stock index, from November 30, 1993 to May30, 1994.Hull-White and Amin-Ng pricing formulas were used. These prices werecomparedwith actual prices and with those derived from the Black-Scholesformula,trying to detect the biases reported previously in the literature. Whereasthe conditional variance of the MIBOR90 interest rate seemed to be freeofARCH effects, an asymmetric GARCH with in-the-mean and seasonalityeffectsand some evidence of persistence in variance (IEGARCH(1,2)-M-S) wasfoundto be the model that best represent the behavior of the stochasticvolatilityof the IBEX-35 stock returns. All the biases reported previously in theliterature were found. All the formulas overpriced the options inNear-the-Moneycase and underpriced the options otherwise. Furthermore, in most optiontrading, Black-Scholes overpriced the options and, because of thetime-to-maturityeffect, implied volatility computed from the Black-Scholes formula,underestimatedthe actual volatility.

Spanning tests in return and stochastic discount factor mean-variance frontiers: A unifying approach

We propose new spanning tests that assess if the initial and additional assets share theeconomically meaningful cost and mean representing portfolios. We prove their asymptoticequivalence to existing tests under local alternatives. We also show that unlike two-step oriterated procedures, single-step methods such as continuously updated GMM yield numericallyidentical overidentifyng restrictions tests, so there is arguably a single spanning test.To prove these results, we extend optimal GMM inference to deal with singularities in thelong run second moment matrix of the influence functions. Finally, we test for spanningusing size and book-to-market sorted US stock portfolios.

The equity premium and the risk free rate: A cross country, cross maturity examination

This paper examines the relationship between the equity premium and the risk free rate at three different maturities using post 1973 data fora panel of 7 OECD countries. We show the existence of subsample instabilities,of some cross country differences and of inconsistencies with the expectations theory of the term structure. We perform simulations using a standard consumptionbased CAPM model and demonstrate that the basic features of Mehra and Prescott's(1985) puzzle remain, regardless of the time period, the investment maturity and the country considered. Modifications of the basic setup are also considered.