Risk Aversion, Intertemporal Substitution, and Option Pricing

This paper develops a general stochastic framework and an equilibrium asset pricing model that make clear how attitudes towards intertemporal substitution and risk matter for option pricing. In particular, we show under which statistical conditions option pricing formulas are not preference-free, in other words, when preferences are not hidden in the stock and bond prices as they are in the standard Black and Scholes (BS) or Hull and White (HW) pricing formulas. The dependence of option prices on preference parameters comes from several instantaneous causality effects such as the so-called leverage effect. We also emphasize that the most standard asset pricing models (CAPM for the stock and BS or HW preference-free option pricing) are valid under the same stochastic setting (typically the absence of leverage effect), regardless of preference parameter values. Even though we propose a general non-preference-free option pricing formula, we always keep in mind that the BS formula is dominant both as a theoretical reference model and as a tool for practitioners. Another contribution of the paper is to characterize why the BS formula is such a benchmark. We show that, as soon as we are ready to accept a basic property of option prices, namely their homogeneity of degree one with respect to the pair formed by the underlying stock price and the strike price, the necessary statistical hypotheses for homogeneity provide BS-shaped option prices in equilibrium. This BS-shaped option-pricing formula allows us to derive interesting characterizations of the volatility smile, that is, the pattern of BS implicit volatilities as a function of the option moneyness. First, the asymmetry of the smile is shown to be equivalent to a particular form of asymmetry of the equivalent martingale measure. Second, this asymmetry appears precisely when there is either a premium on an instantaneous interest rate risk or on a generalized leverage effect or both, in other words, whenever the option pricing formula is not preference-free. Therefore, the main conclusion of our analysis for practitioners should be that an asymmetric smile is indicative of the relevance of preference parameters to price options.

Essays in open economy macroeconomics with borrowing frictions

Cette thèse comporte trois essais en macroéconomie en économie ouverte et commerce international. Je considère tour à tour les questions suivantes: sous quelles conditions est-il optimal pour un pays de former une union économique? (essai 1); l'augmentation de la dispersion transversale des avoirs extérieurs nets des pays est-elle compatible avec une dispersion relativement stable des taux d'investissement? (essai 2); le risque de perte de marché à l'exportation du fait de l'existence des zones de commerce préférentiel joue t-il un rôle dans la décision des pays exclus de négocier des accords commerciaux à leur tour? (essai 3). Le premier essai examine les conditions d'optimalité d'une union économique. Il s'intéresse à une motivation particulière: le partage du risque lié aux fluctuations du revenu. Dans la situation initiale, les pays ont très peu d'opportunités pour partager le risque à cause des frictions: les marchés financiers internationaux sont incomplets et il n'y pas de mécanisme pour faire respecter les contrats de crédit entre pays. Dans ce contexte, une union économique apparait comme un arrangement qui pallie à ces frictions entre les pays membres seulement. Cependant, l'union dans son ensemble continue de faire face à ces frictions lorsqu'elle échange avec le reste du monde. L'arbitrage clé dans le modèle est le suivant. D'un coté, l'intégration économique permet un meilleur partage du risque entre pays membres et la possibilité pour le partenaire pauvre d'utiliser la ligne de crédit du partenaire riche en cas de besoin. De l'autre coté, l'union peut faire face à une limite de crédit plus restrictive parce que résilier la dette extérieure est moins coûteux pour les membres l'union. De plus, le fait que le partenaire pauvre peut utiliser la limite de crédit du partenaire riche génère une externalité négative pour ce dernier qui se retrouve plus fréquemment contraint au niveau des marchés internationaux des capitaux. En conformité avec les faits observés sur l'intégration économique, le modèle prédit que les unions économiques sont relativement peu fréquentes, sont plus susceptibles d'être créées parmi des pays homogènes, et généralement riches. Le deuxième essai porte sur la dispersion des avoirs extérieurs nets et la relation avec la dispersion des taux d'investissement. Au cours des récentes décennies, la dispersion croissante des déséquilibres extérieurs et les niveaux record atteints par certaines grandes économies ont reçu une attention considérable. On pourrait attribuer ce phénomène à une réduction des barrières aux mouvements internationaux des capitaux. Mais dans ce cas, il est légitime de s'attendre à une augmentation de la dispersion au niveau des taux d'investissement; ceci, parce que le financement des besoins en investissements constitue une raison fondamentale pour laquelle les pays échangent les capitaux. Les données indiquent cependant que la dispersion des taux d'investissement est restée relativement stable au cours des récentes décennies. Pour réconcilier ces faits, je construis un modèle d'équilibre général dynamique et stochastique où les pays sont hétérogènes en raison des chocs idiosyncratiques à leurs niveaux de productivité totale des facteurs. Au niveau des marchés internationaux des capitaux, le menu des actifs disponibles est restreint à une obligation sans risque et il n'y a pas de mécanisme pour faire respecter les contrats de crédit entre pays. A tout moment, un pays peut choisir de résilier sa dette extérieure sous peine d'exclusion financière et d'un coût direct. Ce coût direct reflète les canaux autres que l'exclusion financière à travers lesquels les pays en défaut sont pénalisés. Lorsque le modèle est calibré pour reproduire l'évolution de la dispersion transversale des avoirs extérieurs nets, il produit une dispersion relativement stable des taux d'investissement. La raison principale est que les incitations que les pays ont à investir sont liées à la productivité. Avec l'intégration financière, même si les opportunités d'emprunt se sont multipliées, les incitations à investir n'ont pas beaucoup changé. Ce qui permet de générer une dispersion accrue de la position des avoirs extérieurs nets des pays avec une dispersion relativement stable des taux d'investissement. Le troisième essai analyse un aspect de l'interdépendance dans la formation des accords commerciaux préférentiels: j'examine empiriquement si le risque de diversion des exportations en faveur des pays membres des zones de commerce préférentiel est un facteur déterminant dans la décision des pays exclus de ces accords de négocier un accord à leur tour. Je construis un indicateur qui mesure le potentiel de diversion des exportations auquel font face les pays et estime un modèle probit de formation des zones de commerce préférentiel créées entre 1961 et 2005. Les résultats confirment que les pays confrontés à un plus grand potentiel de détournement des échanges sont plus susceptibles de former une zone de commerce préférentiel à leur tour.

Uptake of a free coronary heart disease risk screening programme in community pharmacy: the Healthy Heart Assessment service

Introduction Health promotion (HP) aims to enhance good health while preventing ill-health at three levels of activity; primary (preventative), secondary (diagnostic) and tertiary (management).1 It can range from simple provision of health education to ongoing support, but the effectiveness of HP is ultimately dependent on its ability to influence change. HP as part of the Community Pharmacy Contract (CPC) aims to increase public knowledge and target ‘hard-to-reach’ individuals by focusing mainly on primary and tertiary HP. The CPC does not include screening programmes (secondary HP) as a service. Coronary heart disease (CHD) is a significant cause of morbidity and mortality in the UK. While there is evidence to support the effectiveness of some community pharmacy HP strategies in CHD, there is paucity of research in relation to screening services.2 Against this background, Alliance Pharmacy introduced a free CHD risk screening programme to provide tailored HP advice as part of a participant–pharmacist consultation. The aim of this study is to report on the CHD risk levels of participants and to provide a qualitative indication of consultation outcomes. Methods Case records for 12 733 people who accessed a free CHD risk screening service between August 2004 and April 2006 offered at 217 community pharmacies were obtained. The service involved initial self-completion of the Healthy Heart Assessment (HHA) form and measurement of height, weight, body mass index, blood pressure, total cholesterol and highdensity lipoprotein levels by pharmacists to calculate CHD risk.3 Action taken by pharmacists (lifestyle advice, statin recommendation or general practitioner (GP) referral) and qualitative statements of advice were recorded, and a copy provided to the participants. The service did not include follow-up of participants. All participants consented to taking part in evaluations of the service. Ethical committee scrutiny was not required for this service development evaluation. Results Case records for 10 035 participants (3658 male) were evaluable; 5730 (57%) were at low CHD risk (<15%); 3636 (36%) at moderate-to-high CHD risk (≥15%); and 669 (7%) had existing heart disease. A significantly higher proportion of male (48% versus 30% female) participants were at moderate- to-high risk of CHD (chi-square test; P < 0.005). A range of outcomes resulted from consultations. Lifestyle advice was provided irrespective of participants’ CHD risk or existing disease. In the moderate-to-high-risk group, of which 52% received prescribed medication, lifestyle advice was recorded for 62%, 16% were referred and 34% were advised to have a re-assessment. Statin recommendations were made in 1% of all cases. There was evidence of supportive and motivational statements in the advice recorded. Discussion Pharmacists were able to identify individuals’ level of CHD risk and provide them with bespoke advice. Identification of at-risk participants did not automatically result in referrals or statin recommendation. One-third of those accessing the screening service had moderate-to-high risk of CHD, a significantly higher proportion of whom were men. It is not known whether these individuals had been previously exposed to HP but presumably by accessing this service they may have contemplated change. As effectiveness of HP advice will depend among other factors on ability to influence change, future consultations may need to explore patients’ attitude towards change in relation to the Trans Theoretical Model4 to better tailor HP advice. The high uptake of the service by those at moderate-to-high CHD risk indicates a need for this type of screening programme in community pharmacy, perhaps specifically to reach men who access medical services less.

Effects of dietary fat modification on insulin sensitivity and on other risk factors of the metabolic syndrome—LIPGENE: a European randomized dietary intervention study

Background:Excessive energy intake and obesity lead to the metabolic syndrome (MetS). Dietary saturated fatty acids (SFAs) may be particularly detrimental on insulin sensitivity (SI) and on other components of the MetS. Objective:This study determined the relative efficacy of reducing dietary SFA, by isoenergetic alteration of the quality and quantity of dietary fat, on risk factors associated with MetS. Design:A free-living, single-blinded dietary intervention study. Subjects and Methods:MetS subjects (n=417) from eight European countries completed the randomized dietary intervention study with four isoenergetic diets distinct in fat quantity and quality: high-SFA; high-monounsaturated fatty acids and two low-fat, high-complex carbohydrate (LFHCC) diets, supplemented with long chain n-3 polyunsaturated fatty acids (LC n-3 PUFAs) (1.2 g per day) or placebo for 12 weeks. SI estimated from an intravenous glucose tolerance test (IVGTT) was the primary outcome measure. Lipid and inflammatory markers associated with MetS were also determined. Results:In weight-stable subjects, reducing dietary SFA intake had no effect on SI, total and low-density lipoprotein cholesterol concentration, inflammation or blood pressure in the entire cohort. The LFHCC n-3 PUFA diet reduced plasma triacylglycerol (TAG) and non-esterified fatty acid concentrations (P<0.01), particularly in men. Conclusion:There was no effect of reducing SFA on SI in weight-stable obese MetS subjects. LC n-3 PUFA supplementation, in association with a low-fat diet, improved TAG-related MetS risk profiles.

What will be the risk-free rate and benchmark yield curve following European monetary union?

Using a linear factor model, we study the behaviour of French, Germany, Italian and British sovereign yield curves in the run up to EMU. This allows us to determine which of these yield curves might best approximate a benchmark yield curve post EMU. We find that the best approximation for the risk free yield is the UK three month T-bill yield, followed by the German three month T-bill yield. As no one sovereign yield curve dominates all others, we find that a composite yield curve, consisting of French, Italian and UK bonds at different maturity points along the yield curve should be the benchmark post EMU.

Assessing risk for sexual offenders in New Zealand : development and validation of a computer-scored risk measure

A growing research base supports the predictive validity of actuarial methods of risk assessment with sexual offenders. These methods use clearly defined variables with demonstrated empirical association with re-offending. The advantages of actuarial measures for screening large numbers of offenders quickly and economically are further enhanced when the variables used can be extracted from existing electronic databases. This study reports the results of applying a computerized set of historical variables with a sample of 1,133 male sexual offenders released from prison by the New Zealand Department of Corrections. Area under the curve figures of 0.70-0.78 were obtained over periods of 5 to 15 years, reflecting a significant level of association with sexual recidivism. Detected rates of re-offending across risk levels were comparable to those previously reported for the Static-99. Rates of sexual re-offending by child molesters for all sexual offences and offences against child victims are reported separately.

Assessing free-living physical activity using accelerometry : practical issues for researchers and practitioners

Physical activity is an integral component of a healthy lifestyle, with relationships documented between physical activity, chronic diseases, and disease risk factors. There is increasing concern that many people are not sufficiently active to benefit their health. Consequently, there is a need to determine the prevalence of physical activity engagement, identify active and inactive segments of the population, and evaluate the effectiveness of interventions. The aim of the present study was to identify and explain a number of methodological and decision-making processes associated with accelerometry, which is the most commonly used objective measure of physical activity in child and adult research.

Specifically, this review addresses:
(a) pre-data collection decisions,
(b) data collection procedures,
(c) processing of accelerometer data, and
(d) outcome variables in relation to the research questions posed.

An appraisal of the literature is provided to help researchers and practitioners begin field-based research, with recommendations offered for best practice. In addition, issues that require further investigation are identified and discussed to inform researchers and practitioners of the surrounding debates.

Overall, the review is intended as a starting point for field-based physical activity research using accelerometers and as an introduction to key issues that should be considered and are likely to be encountered at this time.

Age at quitting smoking as a predictor of risk of cardiovascular disease incidence independent of smoking status, time since quitting and pack-years

Background: Risk prediction for CVD events has been shown to vary according to current smoking status, pack-years smoked over a lifetime, time since quitting and age at quitting. The latter two are closely and inversely related. It is not known whether the age at which one quits smoking is an additional important predictor of CVD events. The aim of this study was to determine whether the risk of CVD events varied according to age at quitting after taking into account current smoking status, lifetime pack-years smoked and time since quitting.
Findings. We used the Cox proportional hazards model to evaluate the risk of developing a first CVD event for a cohort of participants in the Framingham Offspring Heart Study who attended the fourth examination between ages 30 and 74 years and were free of CVD. Those who quit before the median age of 37 years had a risk of CVD incidence similar to those who were never smokers. The incorporation of age at quitting in the smoking variable resulted in better prediction than the model which had a simple current smoker/non-smoker measure and the one that incorporated both time since quitting and pack-years. These models demonstrated good discrimination, calibration and global fit. The risk among those quitting more than 5 years prior to the baseline exam and those whose age at quitting was prior to 44 years was similar to the risk among never smokers. However, the risk among those quitting less than 5 years prior to the baseline exam and those who continued to smoke until 44 years of age (or beyond) was two and a half times higher than that of never smokers.
Conclusions: Age at quitting improves the prediction of risk of CVD incidence even after other smoking measures are taken into account. The clinical benefit of adding age at quitting to the model with other smoking measures may be greater than the associated costs. Thus, age at quitting should be considered in addition to smoking status, time since quitting and pack-years when counselling individuals about their cardiovascular risk.

Framingham risk prediction equations for incidence of cardiovascular disease using detailed measures for smoking

Current prediction models for risk of cardiovascular disease (CVD) incidence incorporate smoking as a dichotomous yes/no measure. However, the risk of CVD associated with smoking also varies with the intensity and duration of smoking and there is a strong association between time since quitting and the risk of disease onset. This study aims to develop improved risk prediction equations for CVD incidence incorporating intensity and duration of smoking and time since quitting. The risk of developing a first CVD event was evaluated using a Cox’s model for participants in the Framingham offspring cohort who attended the fourth examination (1988–92) between the ages of 30 and 74 years and were free of CVD (n=3751). The full models based on the smoking variables and other risk factors, and reduced models based on the smoking variables and non-laboratory risk factors demonstrated good discrimination, calibration and global fit. The incorporation of both time since quitting among past smokers and pack-years among current smokers resulted in better predictive performance as compared to a dichotomous current/non-smoker measure and a current/quitter/never smoker measure. Compared to never smokers, the risk of CVD incidence increased with pack-years. Risk among those quitting more than five years prior to the baseline exam and within five years prior to the baseline exam were similar and twice as high as that of never smokers. A CVD risk equation incorporating the effects of pack-years and time since quitting provides an improved tool to quantify risk and guide preventive care.

Fuzzy portfolio allocation models through a new risk measure and fuzzy sharpe ratio

A new portfolio risk measure that is the uncertainty of portfolio fuzzy return is introduced in this paper. Beyond the well-known Sharpe ratio (i.e., the reward-to-variability ratio) in modern portfolio theory, we initiate the so-called fuzzy Sharpe ratio in the fuzzy modeling context. In addition to the introduction of the new risk measure, we also put forward the reward-to-uncertainty ratio to assess the portfolio performance in fuzzy modeling. Corresponding to two approaches based on TM and TW fuzzy arithmetic, two portfolio optimization models are formulated in which the uncertainty of portfolio fuzzy returns is minimized, while the fuzzy Sharpe ratio is maximized. These models are solved by the fuzzy approach or by the genetic algorithm (GA). Solutions of the two proposed models are shown to be dominant in terms of portfolio return uncertainty compared with those of the conventional mean-variance optimization (MVO) model used prevalently in the financial literature. In terms of portfolio performance evaluated by the fuzzy Sharpe ratio and the reward-to-uncertainty ratio, the model using TW fuzzy arithmetic results in higher performance portfolios than those obtained by both the MVO and the fuzzy model, which employs TM fuzzy arithmetic. We also find that using the fuzzy approach for solving multiobjective problems appears to achieve more optimal solutions than using GA, although GA can offer a series of well-diversified portfolio solutions diagrammed in a Pareto frontier.

Exact arbitrage, well-diversified portfolios and asset pricing in large markets

: In a model of a nancial market with an atomless continuum of assets, we give a precise and rigorous meaning to the intuitive idea of a \well-diversi ed" portfolio and to a notion of \exact arbitrage". We show this notion to be necessary and su cient for an APT pricing formula to hold, to be strictly weaker than the more conventional notion of \asymptotic arbitrage", and to have novel implications for the continuity of the cost functional as well as for various versions of APT asset pricing. We further justify the idealized measure-theoretic setting in terms of a pricing formula based on \essential" risk, one of the three components of a tri-variate decomposition of an asset's rate of return, and based on a speci c index portfolio constructed from endogenously extracted factors and factor loadings. Our choice of factors is also shown to satisfy an optimality property that the rst m factors always provide the best approximation. We illustrate how the concepts and results translate to markets with a large but nite number of assets, and relate to previous work.

Análise dos retornos e características da estratégia de risk arbitrage no Brasil

O presente trabalho tem o objetivo de analisar os retornos de um portfólio investido na estratégia de risk arbitrage no Brasil entre 2004 e 2014, determinando se esta estratégia proporciona retornos anormais. De setembro de 2004 a dezembro de 2014, o portfólio de risk arbitrage gerou, depois de deduzidos os custos, um retorno anualizado de 14,40%, enquanto que o ativo livre de risco gerou retornos de 11,60% e o Índice Bovespa gerou 12,62%. Os resultados indicam que, usando-se tanto o CAPM como o modelo de três fatores de Fama e French (1993), a estratégia proporciona retornos anormais. Um segundo objetivo desse estudo é analisar se a distribuição dos retornos dessa estratégia é assimétrica. As evidências apontam para assimetria na distribuição dos retornos. Em função disto, foi utilizada a metodologia de Contingent Claims, que controla o efeito da relação não linear com os retornos de mercado, para analisar se mesmo assim a estratégia oferece retornos anormais. Com essa metodologia, não foram encontrados retornos anormais estatisticamente significativos. Por fim, o último objetivo desse estudo é analisar se o payoff da estratégia de risk arbitrage é análogo ao payoff da venda de uma put. Não foram encontradas evidências de que o payoff seja análogo ao da venda de uma opção de venda.