Essays in higher moment asset pricing and liquidity risk

This thesis focuses on theoretical asset pricing models and their empirical applications. I aim to investigate the following noteworthy problems: i) if the relationship between asset prices and investors' propensities to gamble and to fear disaster is time varying, ii) if the conflicting evidence for the firm and market level skewness can be explained by downside risk, Hi) if costly learning drives liquidity risk. Moreover, empirical tests support the above assumptions and provide novel findings in asset pricing, investment decisions, and firms' funding liquidity. The first chapter considers a partial equilibrium model where investors have heterogeneous propensities to gamble and fear disaster. Skewness preference represents the desire to gamble, while kurtosis aversion represents fear of extreme returns. Using US data from 1988 to 2012, my model demonstrates that in bad times, risk aversion is higher, more people fear disaster, and fewer people gamble, in contrast to good times. This leads to a new empirical finding: gambling preference has a greater impact on asset prices during market downturns than during booms. The second chapter consists of two essays. The first essay introduces a foramula based on conditional CAPM for decomposing the market skewness. We find that the major market upward and downward movements can be well preadicted by the asymmetric comovement of betas, which is characterized by an indicator called "Systematic Downside Risk" (SDR). We find that SDR can efafectively forecast future stock market movements and we obtain out-of-sample R-squares (compared with a strategy using historical mean) of more than 2.27% with monthly data. The second essay reconciles a well-known empirical fact: aggregating positively skewed firm returns leads to negatively skewed market return. We reconcile this fact through firms' greater response to negative maraket news than positive market news. We also propose several market return predictors, such as downside idiosyncratic skewness. The third chapter studies the funding liquidity risk based on a general equialibrium model which features two agents: one entrepreneur and one external investor. Only the investor needs to acquire information to estimate the unobservable fundamentals driving the economic outputs. The novelty is that information acquisition is more costly in bad times than in good times, i.e. counter-cyclical information cost, as supported by previous empirical evidence. Later we show that liquidity risks are principally driven by costly learning. Résumé Cette thèse présente des modèles théoriques dévaluation des actifs et leurs applications empiriques. Mon objectif est d'étudier les problèmes suivants: la relation entre l'évaluation des actifs et les tendances des investisseurs à parier et à crainadre le désastre varie selon le temps ; les indications contraires pour l'entreprise et l'asymétrie des niveaux de marché peuvent être expliquées par les risques de perte en cas de baisse; l'apprentissage coûteux augmente le risque de liquidité. En outre, des tests empiriques confirment les suppositions ci-dessus et fournissent de nouvelles découvertes en ce qui concerne l'évaluation des actifs, les décisions relatives aux investissements et la liquidité de financement des entreprises. Le premier chapitre examine un modèle d'équilibre où les investisseurs ont des tendances hétérogènes à parier et à craindre le désastre. La préférence asymétrique représente le désir de parier, alors que le kurtosis d'aversion représente la crainte du désastre. En utilisant les données des Etats-Unis de 1988 à 2012, mon modèle démontre que dans les mauvaises périodes, l'aversion du risque est plus grande, plus de gens craignent le désastre et moins de gens parient, conatrairement aux bonnes périodes. Ceci mène à une nouvelle découverte empirique: la préférence relative au pari a un plus grand impact sur les évaluations des actifs durant les ralentissements de marché que durant les booms économiques. Exploitant uniquement cette relation générera un revenu excédentaire annuel de 7,74% qui n'est pas expliqué par les modèles factoriels populaires. Le second chapitre comprend deux essais. Le premier essai introduit une foramule base sur le CAPM conditionnel pour décomposer l'asymétrie du marché. Nous avons découvert que les mouvements de hausses et de baisses majeures du marché peuvent être prédits par les mouvements communs des bêtas. Un inadicateur appelé Systematic Downside Risk, SDR (risque de ralentissement systématique) est créé pour caractériser cette asymétrie dans les mouvements communs des bêtas. Nous avons découvert que le risque de ralentissement systématique peut prévoir les prochains mouvements des marchés boursiers de manière efficace, et nous obtenons des carrés R hors échantillon (comparés avec une stratégie utilisant des moyens historiques) de plus de 2,272% avec des données mensuelles. Un investisseur qui évalue le marché en utilisant le risque de ralentissement systématique aurait obtenu une forte hausse du ratio de 0,206. Le second essai fait cadrer un fait empirique bien connu dans l'asymétrie des niveaux de march et d'entreprise, le total des revenus des entreprises positiveament asymétriques conduit à un revenu de marché négativement asymétrique. Nous décomposons l'asymétrie des revenus du marché au niveau de l'entreprise et faisons cadrer ce fait par une plus grande réaction des entreprises aux nouvelles négatives du marché qu'aux nouvelles positives du marché. Cette décomposition révélé plusieurs variables de revenus de marché efficaces tels que l'asymétrie caractéristique pondérée par la volatilité ainsi que l'asymétrie caractéristique de ralentissement. Le troisième chapitre fournit une nouvelle base théorique pour les problèmes de liquidité qui varient selon le temps au sein d'un environnement de marché incomplet. Nous proposons un modèle d'équilibre général avec deux agents: un entrepreneur et un investisseur externe. Seul l'investisseur a besoin de connaitre le véritable état de l'entreprise, par conséquent, les informations de paiement coutent de l'argent. La nouveauté est que l'acquisition de l'information coute plus cher durant les mauvaises périodes que durant les bonnes périodes, comme cela a été confirmé par de précédentes expériences. Lorsque la récession comamence, l'apprentissage coûteux fait augmenter les primes de liquidité causant un problème d'évaporation de liquidité, comme cela a été aussi confirmé par de précédentes expériences.

Relative Uncertainty and Additively Representable Set Rankings

This paper proposes a definition of relative uncertainty aversion for decision models under complete uncertainty. It is shown that, for a large class of decision rules characterized by a set of plausible axioms, the new criterion yields a complete ranking of those rules with respect to the relative degree of uncertainty aversion they represent. In addition, we address a combinatorial question that arises in this context, and we examine conditions for the additive representability of our rules.

ECONOMICAL OCCUPATION OF AGRICULTURAL AREA OF PIRACICABA (SAO PAULO STATE, BRAZIL), INCLUDING RISK THROUGH LINEAR PROGRAMMING

The economic occupation of an area of 500 ha for Piracicaba was studied with the irrigated cultures of maize, tomato, sugarcane and beans, having used models of deterministic linear programming and linear programming including risk for the Target-Motad model, where two situations had been analyzed. In the deterministic model the area was the restrictive factor and the water was not restrictive for none of the tested situations. For the first situation the gotten maximum income was of R$ 1,883,372.87 and for the second situation it was of R$ 1,821,772.40. In the model including risk a producer that accepts risk can in the first situation get the maximum income of R$ 1,883,372. 87 with a minimum risk of R$ 350 year(-1), and in the second situation R$ 1,821,772.40 with a minimum risk of R$ 40 year(-1). Already a producer averse to the risk can get in the first situation a maximum income of R$ 1,775,974.81 with null risk and for the second situation R$ 1.707.706, 26 with null risk, both without water restriction. These results stand out the importance of the inclusion of the risk in supplying alternative occupations to the producer, allowing to a producer taking of decision considered the risk aversion and the pretension of income.

Refining the risk-benefit equation for thrombolysis: How to identity the low risk patient before administering thrombolytic therapy

In view of the relative risk of intracranial haemorrhage and major bleeding with thrombolytic therapy, it is important ro identify as early as possible the low risk patient who may not have a net clinical benefit from thrombolysis in the setting of acute myocardial infarction. An analysis of 5434 hospital-treated patients with myocardial infarction in the Perth MONICA study showed that age below 60 and absence of previous infarction or diabetes, shock, pulmonary oedema, cardiac arrest and Q-wave or left bundle branch block on the initial ECG identified a large group of patients with a 28 day mortality of only 1%, and one year mortality of only 2%. Identification of baseline risk in this way helps refine the risk-benefit equation for thrombolytic therapy, and may help avoid unnecessary use of thrombolysis in those unlikely to benefit.

Background risk in generalized expected utility theory

In this paper, it is shown that, for a wide range of risk-averse generalized expected utility preferences, independent risks are complementary, contrary to the results for expected utility preferences satisfying conditions such as proper and standard risk aversion.

Current smoking and the risk of non-fatal myocardial infarction in the WHO MONICA Project populations

Background: Cohort studies have shown that smoking has a substantial influence on coronary heart disease mortality in young people. Population based data on non-fatal events have been sparse, however. Objective: To study the impact of smoking on the risk of non-fatal acute myocardial infarction (MI) in young middle age people. Methods: From 1985 to 1994 all non-fatal MI events in the age group 35 - 64 were registered in men and women in the WHO MONICA ( multinational monitoring of trends and determinants in cardiovascular disease) project populations ( 18 762 events in men and 4047 in women from 32 populations from 21 countries). In the same populations and age groups 65 741 men and 66 717 women participated in the surveys of risk factors ( overall response rate 72%). The relative risk of non-fatal MI for current smokers was compared with non-smokers, by sex and five year age group. Results: The prevalence of smoking in people aged 35 - 39 years who experienced non-fatal MI events was 81% in men and 77% in women. It declined with increasing age to 45% in men aged 60 - 64 years and 36% in women, respectively. In the 35 - 39 years age group the relative risk of non-fatal MI for smokers was 4.9 (95% confidence interval (CI) 3.9 to 6.1) in men and 5.3 ( 95% CI 3.2 to 8.7) in women, and the population attributable fractions were 65% and 55%, respectively. Conclusions: During the study period more than half of the non-fatal MIs occurring in young middle age people can be attributed to smoking.

Prevalence of peripheral arterial disease: persistence of excess risk in former smokers

Objective: To determine the age-standardised prevalence of peripheral arterial disease (PAD) and associated risk factors, particularly smoking. Method: Design: Cross-sectional survey of a randomly selected population. Setting: Metropolitan area of Perth, Western Australia. Participants: Men aged between 65-83 years. Results: The adjusted response fraction was 77.2%. Of 4,470 men assessed, 744 were identified as having PAD by the Edinburgh Claudication Questionnaire and/or the ankle-brachial index of systolic blood pressure, yielding an age-standardised prevalence of PAD of 15.6% (95% confidence intervals (CI): 14.5%, 16.6%). The main risk factors identified in univariate analyses were increasing age, smoking current (OR=3.9, 95% CI 2.9-5.1) or former (OR=2.0, 95% CI 1.6-2.4), physical inactivity (OR=1.4, 95% CI 1.2-1.7), a history of angina (OR=2.2, 95% CI 1.8-2.7) and diabetes mellitus (OR=2.1, 95% CI 1.7-2.6). The multivariate analysis showed that the highest relative risk associated with PAD was current smoking of 25 or more cigarettes daily (OR=7.3, 95% CI 4.2-12.8). In this population, 32% of PAD was attributable to current smoking and a further 40% was attributable to past smoking by men who did not smoke currently. Conclusions: This large observational study shows that PAD is relatively common in older, urban Australian men. In contrast with its relationship to coronary disease and stroke, previous smoking appears to have a long legacy of increased risk of PAD. Implications: This research emphasises the importance of smoking as a preventable cause of PAD.

Hormone replacement therapy and breast cancer risk in California

Numerous studies have documented increased breast cancer risks with hormone replacement therapy (HRT), but these do not give a woman her specific absolute risk for the remainder of her life. This article estimates the magnitude of the effect of HRT on breast cancer incidence in California and calculates a woman's cumulative risk of breast cancer with different formulations and durations of HRT use. The effects of HRT on the underlying breast cancer incidence were estimated using the attributable fraction method, applying HRT prevalence data from the 2001 California Health Interview Survey and published rates of higher relative risk (RR) from HRT use from the Women's Health Initiative (WHI) study and Million Women's Survey (MWS). The annual number of breast cancers potentially attributable to HRT in California was estimated, along with individual cumulative risk of breast cancer for various ages to 79 years according to HRT use, duration, and formulation. Using the WHI data, 829 of 19,000 breast cancers (4.3%) in California may be attributable to HRT This figure increases to 3401 (17.4%) when the MWS RRs are applied. Use of estrogen-only HRT or short-term (approximately 5 years) use of combined HRT has a minimal effect on the cumulative risk calculated to the age of 79 years; application of the MWS data to a Californian woman commencing HRT at the age of 50 years (no HRT, 8.5%; estrogen only, 8.6%; combined, 9.1%). Prolonged (approximately 10 years) use of combined HRT increases the cumulative risk to 10.3%. This article demonstrates that HRT will generate a small additional risk of breast cancer in an individual. The reduction in perimenopausal symptoms may be considered sufficient to warrant this extra risk. However, this view needs to be balanced because the small increases in individual risk will be magnified, producing a noticeable change in population cancer caseload where HRT use is high.

Overweight and obesity increase the risk of coronary heart disease: A pooled analysis of 30 prospective studies

The importance of overweight as a risk factor for coronary heart disease (CHD) remains unsettled. We estimated the relative risk (RR) for CHD associated with underweight (body mass index, BMI < 20 kg/m2), overweight (25 – 30 kg/m2) and obesity (= 30 kg/m2), compared with normal weight (20 – 25 kg/m2) in a random effects meta-analysis of 30 prospective studies, including 389,239 healthy, predominantly Caucasian persons. We also explored sources of heterogeneity between studies and examined effects of systematic adjustment for confounding and intermediary variables. Pooled age-, sex- and smoking-adjusted RRs (95% confidence interval) for overweight, obesity and underweight compared with normal weight were 1.33 (1.24 – 1.43), 1.69 (1.44 – 1.99) and 1.01 (0.85 – 1.20), respectively. Stratified analyses showed that pooled RRs for BMI were higher for studies with longer follow-up (= vs. < 15 years) and younger populations (< vs. = 60 years). Additional adjustment for blood pressure, cholesterol levels and physical activity decreased the RR per 5 BMI units from 1.28 (1.21 – 1.34) to 1.16 (1.11 – 1.21). We conclude that overweight and obesity are associated with a substantially increased CHD risk in Caucasians, whereas underweight is not. Prevention and reduction of overweight and obesity, therefore, remain of importance for preventing CHD.

A Randomized Trial of a Skin Sealant to Reduce the Risk of Incision Contamination in Cardiac Surgery

Background. Immobilizing skin microbes is a rational approach to reducing contamination of surgical sites by endogenous microorganisms. Methods. This randomized, controlled, parallel-group, multicenter, open-label clinical trial (ClinicalTrials.gov NCT00467857) enrolled 300 adults scheduled for elective coronary artery bypass graft surgery. Patients received iodine-based skin preparations followed by a cyanoacrylate-based skin sealant or skin preparations alone. Microbiological samples collected from sternal and graft incision sites immediately before any skin preparation, at the wound border after skin incision, and at the incision after fascial closure were evaluated quantitatively. Results. In evaluable patients, mean microbial counts in collected samples increased at the sternal site after fascial closure compared with after skin incision by 0.37 log(10) colony-forming units (CFU)/mL in the skin sealant group (n = 120) and by 0.57 log10 CFU/mL in the control group (n = 132) (p = 0.047, Wilcoxon rank sum test). At the graft site, mean microbial counts increased by 0.09 (n = 119) and 0.27 (n = 127) log(10) CFU/mL, respectively (p = 0.037). There was a 35.3% relative risk reduction in surgical site infection (SSI) occurring in the skin sealant group (9 of 146 patients, 6.2%) versus the control group (14 of 147 patients, 9.5%). In obese patients (body mass index [BMI] > 30.0 to <= 37.0 kg/m(2)), the relative risk reduction for SSI associated with skin sealant was 83.3%. Conclusions. Pretreatment with skin sealant protects against contamination of the surgical incision by migration of skin microbes. Further data are needed to confirm the impact of this technology on SSI rates in clinical practice. (Ann Thorac Surg 2011;92:632-7) (C) 2011 by The Society of Thoracic Surgeons ADULT CARDIAC

Prevention of Venous Thrombosis by Warfarin after Permanent Transvenous Leads Implantation in High-Risk Patients

Background: The incidence of venous lesions following transvenous cardiac device implantation is high. Previous implantation of temporary leads ipsilateral to the permanent devices, and a depressed left ventricular ejection fraction have been associated with an increased risk of venous lesions, though the effects of preventive strategies remain controversial. This randomized trial examined the effects of warfarin in the prevention of these complications in high-risk patients. Method: Between February 2004 and September 2007, we studied 101 adults who underwent a first cardiac device implantation, and who had a left ventricular ejection fraction <= 0.40, or a temporary pacing system ipsilateral to the permanent implant, or both. After device implantation, the patients were randomly assigned to warfarin to a target international normalized ratio of 2.0-3.5, or to placebo. Clinical and laboratory evaluations were performed regularly up to 6 months postimplant. Venous lesions were detected at 6 months by digital subtraction venography. Results: Venous obstructions of various degrees were observed in 46 of the 92 patients (50.0%) who underwent venography. The frequency of venous obstructions was 60.4% in the placebo, versus 38.6% in the warfarin group (P = 0.018), corresponding to an absolute risk reduction of 22% (relative risk = 0.63; 95% confidence interval = 0.013-0.42). Conclusions: Warfarin prophylaxis lowered the frequency of venous lesions after transvenous devices implantation in high-risk patients. (PACE 2009; 32:S247-S251)

Cigarette smoking and risk of epithelial ovarian cancer (Australia)

Objectives: We studied the association between cigarette smoking and ovarian cancer in a population-based case-control study. Methods: A total of 794 women with histologically confirmed epithelial ovarian cancer who were aged 18-79 years and resident in one of three Australian states were interviewed, together with 855 controls aged 18-79 years selected at random from the electoral roll from the same states. Information was obtained about cigarette smoking and other factors including age, parity, oral contraceptive use, and reproductive factors. We estimated the relative risk of ovarian cancer associated with cigarette smoking, accounting for histologic type, using multivariable logistic regression to adjust for confounding factors. Results: Women who had ever smoked cigarettes were more likely to develop ovarian cancer than women who had never smoked (adjusted odds ratio (OR) = 1.5; 95% confidence interval (CI) = 1.2-1.9). Risk was greater for ovarian cancers of borderline malignancy (OR = 2.4; 95% CI = 1.4-4.1) than for invasive tumors (OR = 1.7; 95% CI = 1.2-2.4) and the histologic subtype most strongly associated overall was the mucinous subtype among both current smokers (OR = 3.2; 95% CI = 1.8-5.7) and past smokers (OR = 2.3; 95% CI = 1.3-3.9). Conclusions: These data extend recent findings and suggest that cigarette smoking is a risk factor for ovarian cancer, especially mucinous and borderline mucinous types. From a public health viewpoint, this is one of the few reports of a potentially avoidable risk factor for ovarian cancer.

Long-term risk stratification for survivors of acute coronary syndromes - Results from the long-term intervention with pravastatin in ischemic disease (LIPID) study

OBJECTIVES We developed a prognostic strategy for quantifying the long-term risk of coronary heart disease (CHD) events in survivors of acute coronary syndromes (ACS). BACKGROUND Strategies for quantifying long-term risk of CHD events have generally been confined to primary prevention settings. The Long-term Intervention with Pravastatin in Ischemic Disease (LIPID) study, which demonstrated that pravastatin reduces CHD events in ACS survivors with a broad range of cholesterol levels, enabled assessment of long-term prognosis in a secondary prevention setting. METHODS Based on outcomes in 8,557 patients in the LIPID study, a multivariate risk factor model was developed for prediction of CHD death or nonfatal myocardial infarction. Prognostic indexes were developed based on the model, and low-, medium-, high- and very high-risk groups were defined by categorizing the prognostic indexes. RESULTS In addition to pravastatin treatment, the independently significant risk factors included: total and high density lipoprotein cholesterol, age, gender, smoking status, qualifying ACS, prior coronary revascularization, diabetes mellitus, hypertension and prior stroke. Pravastatin reduced coronary event rates in each risk level, and the relative risk reduction did not vary significantly between risk levels. The predicted five-year coronary event rates ranged from 5% to 19% for those assigned pravastatin and from 6.4% to 23.6% fur those assigned placebo. CONCLUSIONS Long-term prognosis of ACS survivors varied substantially according to conventional risk factor profile. Pravastatin reduced coronary risk within all risk levels; however, absolute risk remained high in treated patients with unfavorable profiles. Our risk stratification strategy enables identification of ACS survivors who remain at very high risk despite statin therapy. CT Am Coil Cardiol 2001;38:56-63) (C) 2001 by the American College of Cardiology.

Diet, lifestyle and the risk of Type 2 Diabetes Mellitus in women

Background Previous studies have examined individual dietary and lifestyle factors in relation to type 2 diabetes, but the combined effects of these factors are largely unknown. Methods We followed 84,941 female nurses from 1980 to 1996; these women were free of diagnosed cardiovascular disease, diabetes, and cancer at base line. Information about their diet and lifestyle was updated periodically. A low-risk group was defined according to a combination of five variables: a body-mass index (the weight in kilograms divided by the square of the height in meters) of less than 25; a diet high in cereal fiber and polyunsaturated fat and low in trans fat and glycemic load (which reflects the effect of diet on the blood glucose level); engagement in moderate-to-vigorous physical activity for at least half an hour per day; no current smoking; and the consumption of an average of at least half a drink of an alcoholic beverage per day. Results During 16 years of follow-up, we documented 3300 new cases of type 2 diabetes. Overweight or obesity was the single most important predictor of diabetes. Lack of exercise, a poor diet, current smoking, and abstinence from alcohol use were all associated with a significantly increased risk of diabetes, even after adjustment for the body-mass index. As compared with the rest of the cohort, women in the low-risk group (3.4 percent of the women) had a relative risk of diabetes of 0.09 (95 percent confidence interval, 0.05 to 0.17). A total of 91 percent of the cases of diabetes in this cohort (95 percent confidence interval, 83 to 95 percent) could be attributed to habits and forms of behavior that did not conform to the low-risk pattern. Conclusions Our findings support the hypothesis that the majority of cases of type 2 diabetes could be prevented by the adoption of a healthier lifestyle.

Dietary fat intake and risk of type 2 diabetes in women

Background: The long-term relations between specific types of dietary fat and risk of type 2 diabetes remain unclear. Objective: Our objective was to examine the relations between dietary fat intakes and the risk of type 2 diabetes. Design: We prospectively followed 84204 women aged 34–59 y with no diabetes, cardiovascular disease, or cancer in 1980. Detailed dietary information was assessed at baseline and updated in 1984, 1986, and 1990 by using validated questionnaires. Relative risks of type 2 diabetes were obtained from pooled logistic models adjusted for nondietary and dietary covariates. Results: During 14 y of follow-up, 2507 incident cases of type 2 diabetes were documented. Total fat intake, compared with equivalent energy intake from carbohydrates, was not associated with risk of type 2 diabetes; for a 5% increase in total energy from fat, the relative risk (RR) was 0.98 (95% CI: 0.94, 1.02). Intakes of saturated or monounsaturated fatty acids were also not significantly associated with the risk of diabetes. However, for a 5% increase in energy from polyunsaturated fat, the RR was 0.63 (0.53, 0.76; P < 0.0001) and for a 2% increase in energy from trans fatty acids the RR was 1.39 (1.15, 1.67; P = 0.0006). We estimated that replacing 2% of energy from trans fatty acids isoenergetically with polyunsaturated fat would lead to a 40% lower risk (RR: 0.60; 95% CI: 0.48, 0.75). Conclusions: These data suggest that total fat and saturated and monounsaturated fatty acid intakes are not associated with risk of type 2 diabetes in women, but that trans fatty acids increase and polyunsaturated fatty acids reduce risk. Substituting nonhydrogenated polyunsaturated fatty acids for trans fatty acids would likely reduce the risk of type 2 diabetes substantially.