Dynamic Modeling and Econometrics in Economics and Finance 24 Fredj Jawadi Editor Uncertainty, Expectations and Asset Price Dynamics Essays in Honor of Georges Prat Dynamic Modeling and Econometrics in Economics and Finance Volume 24 Editors StefanMittnik LudwigMaximilianUniversityofMunich Germany WilliSemmler BielefeldUniversity Germany and NewSchoolforSocialResearch NewYork,USA Moreinformationaboutthisseriesathttp://www.springer.com/series/5859 Fredj Jawadi Editor Uncertainty, Expectations and Asset Price Dynamics Essays in Honor of Georges Prat 123 Editor FredjJawadi LilleUniversity LilleCedex,France ISSN1566-0419 ISSN2363-8370 (electronic) DynamicModelingandEconometricsinEconomicsandFinance ISBN978-3-319-98713-2 ISBN978-3-319-98714-9 (eBook) https://doi.org/10.1007/978-3-319-98714-9 LibraryofCongressControlNumber:2018959836 ©SpringerNatureSwitzerlandAG2018 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartof thematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation, broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionorinformation storageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilarmethodology nowknownorhereafterdeveloped. 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ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland An Interview with Georges Prat Abstract The following interview was conducted by Dr. Fredj Jawadi (the University of Lille, France, Email: [email protected]) in April 2018 at theUniversityofParisNanterreandcoversProfessorGeorgesPrat’scareerandhis fields of research. The interview is divided into five parts. The first part concerns some of the salient features of Georges Prat’s career, describing the background context and some general questions about the motivating factors of his research, andhisexperiencewithMauriceAllaisinparticular.Thesecondpartbrieflycovers his academic activities. The third part presents a succinct discussion of Georges’ contributionsto the fieldsof the monetarymarketand businesscycles. The fourth part briefly looks at his current ongoing research on the labour market. The last partconcernshismaincontributionstothedynamicsoffinancialassetprices.The interviewofGeorges’workonthislastfieldofresearchemphasizestheimportance of representations of uncertainty and expectations to understand financial asset prices dynamics. We also take the opportunity to examine some key notions of suitableeconometricmodelsforhandlingfinancialdata.Wehopethatthisinterview will providea better understandingnotonlyof GeorgesPrat’s researchtrajectory, butalsooffinancialassetpricedynamics. Introduction:Overview ofGeorges Prat’s Career andWork BeforemovingontotheinterviewwithProfessorGeorgesPrat,Ibrieflyintroduce hiscareerandworkbelow. After obtaining a Master in Economics and a Licence in Sociology from the University of Paris 10, Georgesbecame an economicsteacher at a high school in Poissy before working at the Faculté Libre de Droit, d’Economie et de Gestion de Paris as an assistant lecturer. In 1976, Georges joined the French Center for Scientific Research (Centre National de la Recherche Scientifique, CNRS) as an associate researcher to make a PhD in economics at the Centre Clément Juglar d’AnalyseMonétaire,whichwasadepartmentoftheCentred’AnalyseEconomique v vi AnInterviewwithGeorgesPrat attachedtoboththeCNRSandtheEcoleNationaleSupérieuredesMinesdeParis. He wrotehis PhD,entitled “TheStock MarketPrice Dynamicsandthe Economic Conjuncture”, under the supervision of Professor Maurice Allais (Nobel Prize in Economics in 1988), defending it in 1981 at the University of Paris 10. After beingtenuredasa SeniorResearcherat theCNRS, GeorgeswaspromotedtoFull ResearchProfessorin1988.GeorgeshasbeenanEmeritusResearchProfessorsince 2013. Georges was Director of the Institut d’Economie Appliquée et d’Econométrie (IEAE) at the University of Paris 10 between 1986 and 1989. He also managed the Centre d’Economie Monétaire Appliquée (CEMA) that belonged to the IEAE overtheperiod1989–1993.Georgeshassupervisedmanymasterdissertationsand PhD theses on a range of topics such as the construction of weighted monetary aggregates, money demand and supply, international portfolio choice, financial integration, expectation and risk in the Forex, level and term structure of interest rates,heterogeneityofbehaviourinstockmarket,non-linearstockpriceadjustment towardsfundamentals,etc. Georgeshasalsoheldseveralresponsibilities,includingmemberoftheNational Committee of the CNRS, memberof the Conseil Nationalde l’InformationStatis- tique, President of the Société de Statistique de Paris and President of the Asso- ciation des Chercheurs Economistes at the CNRS. He also serves as a member of the Scientific Committee of the international network on Money, Banking and Finance(GdRE)designedtoenhancescientificcollaborationsbetweennationaland internationalresearchersfromnumerousuniversitiesandinstitutionsacrossEurope. Georgesis also a member of the Maurice Allais FoundationScientific Committee (ParisTech)anda memberofthe juryforthe MauriceAllaisPrize in Economics. He also sits on the admissions jury at the business school HEC Paris (Section “Economics,SociologyandHistory”). GeorgesPrat’sscientificcontributionscoverarangeoftopicsandfields:money demandandsupplyandmonetarycontrol,psychologicaltimeandeconomicfluctu- ations and unemployment and wages in France. However, his principal research area aligns with the main topic of this volume: “Expectations, Uncertainty and AssetPriceDynamics”.1 Hisoutputrelatedtothistopichaswonvariousscientific prizes and distinctions: the Gaëtan Pirou Prize in 1982 for his PhD awarded by the Chancellerie des Universités de Paris, the Claude-Étienne Bourdin Prize for thebestpaperpublishedintheJournaldelaSociétédeStatistiquedeParisinthe period1984–1986andtheJacquesRueff Prizein1995fromtheNationalIndustry IncentiveSocietyforhiswholeworkonfinancialmarkets.Georgeswasalsorecently giventhe2018AlbertNelsonMarquisAchievementawardfor“hishardworkand dedicationtohisprofession”. 1AlistofGeorgesPrat’spublicationsrelatedtothisareaisprovidedattheendofthisinterview. AnInterviewwithGeorgesPrat vii Georges Prat continues to pursue his research at EconomiX-CNRS at Paris NanterreUniversity,whereheco-supervisesaresearchseminarentitled“Dynamics of Financial Asset Prices” with Remzi Uctum, in the Asset Management and Banking,MoneyandMarketsMasterprogrammes. Context andMotivations Fredj: Q1.WhenandwhydidyoudecidetoconductresearchonEconomic Science? Georges: Atfirst,Iwasinterestedinstudyingsociology,butIsoonrealizedthat economicmattersareakeytounderstandingsocialissues.That’swhy Ibeganstudyingbotheconomicsandsociology.Then,whenIbegan myresearchduringmyMasteryear,Idecidedtoswitchtoeconomics. Fredj: Q2.WhenandwhydidyoudecidetojointheFrenchNationalCenter forScientificResearch(CNRS)andtheParisNanterreUniversity? Georges: After completing my master’s dissertation under the supervision of ProfessorMauriceAllaisatParis10University(todayParisNanterre University), Professor Allais suggested to me that I apply for a researcher’spostattheCNRS.Therewerealotofapplicants,butIgot thejob.That’showIjoinedtheCentred’AnalyseEconomique,which wasattachedtotheEcoledesMinesdeParisandtheCNRS.Thistwo- yearcontractwasrenewedtwotimesandallowedmetofundmyPhD. IrealizethatIwasveryluckytobeinsuchgreatconditionstodomy PhD. Fredj: Q3.WhendidyoufirstmeetProfessorMauriceAllais? Georges: ImetProfessorAllaisforthefirsttimewhenhegaveaseminarentitled “Economics as a Science” at the University of Paris 10 in 1971. Using different empirical charts, Professor Allais defended the idea wherebysocialscienceinvolvessignificantnumericalregularities,as in physics. Compared to what I’d learned in my four undergraduate yearsineconomics,Irememberthatitwasarealshock.Iwasamazed that such phenomena might exist, and it was like a new door to my economicsciencestudieswheretheword“science”wasfullyjustified andrequiredscientificresearch.Itwasaturningdate,andIappliedto joinProfessorAllais’sresearchseminar.Igothisagreementtoattend his seminar, but the selection was rather hard after a long interview andI hadtoagreeto workona topicofhischoice.Next,I prepared mymaster’sdissertationon“Stockpriceandinterestrates”underhis supervision, which was the preliminary step before joining the PhD programme, also under his supervision. During the years I worked underhisdirection,ProfessorAllaishelpedmetodevelopatastefor research,andhetaughtmethethoroughnessneeded.I’mgratefulfor allthosehumanvaluesIlearntfromhim.Itshouldalsobenotedthat viii AnInterviewwithGeorgesPrat his wife Ms. Jacqueline Allais, who was a research engineer at the CNRS,playedanimportantrole,devotedlyactingasaliaisonbetween ProfessorAllais and hisstudentsas wellas teachingcomplementary coursesinmathematicsandstatistics. Fredj: Q4.What’sthemainmemoryofyourworkunderthesupervisionof ProfessorMauriceAllais? Georges: ItwasthepreparationofmyPhD,whichconcernedvariouscountries and focused on the relationship between stock prices and different economic indicators such as interest rates, money supply, inflation, production,consumersentiment,etc.,aswellasprofitsanddividends, of course. My PhD added up to a total of three volumes and 1000 pages! I always presented my results and discussed them at the Allais’ research seminar with other PhD students (there were six PhD students). The criticisms were without concession. Sometimes, Professor Allais would call me at 5 am to tell me: “Prat, what you said on page X is absurd and you have to delete it”. I confess that I heldontoandvaliantlydefendedsomeofmyideas,asIdidn’talways follow his recommendations. This led to some frictions, but I have neverfeltagrudge,neitheronhissidenormine. Teaching,Research Supervisionand Collaboration Fredj: Q5.Whatwereyourfavouritecoursesandclasses? Georges: I was particularly interested in two classes. First, a course called “Economic Dynamics” taught by Professor Gilbert Abhraham-Frois at the University of Paris 10, where I learnt a lot about economic growth models and more generally on the conditions of a dynamic equilibrium regime. Second, a course taught by Professor Allais at the Ecole Nationale Supérieure des Mines de Paris on “Equilibrium andEconomicEfficiency”.Inthiscourse,ProfessorAllaisdiscussed theconditionsofmaximumeconomicefficiency,wherethe“star”was VilfredoPareto,buthe also spokealotabouthisownwork.Bothof these courses were quite remarkableand gave me a great grounding thathasbeenusedasamainstaythroughoutmycareer. Fredj: Q6. You supervised several PhD theses and master dissertations in economicsbetween1988and2012.Howdidyouselectyourstudents? DidyouadoptAllais’smethodtosuperviseyourstudents? Georges: Formasterdissertations,studentschosetheteachersaccordingtotheir desired research topics. Contrariwise, I couldn’t take all the PhD applicantsIreceived,soapartfromparticularcases,Ionlyconsidered applicationsfromstudentswho’dalreadydoneamaster’sdissertation withme.ThismeansthatIalreadyknewtheircapacitytocarryouta scientificproject,aswellastheirdeterminationandabilitytocomplete a PhD. For all theses that I supervised, there was a starting pact, AnInterviewwithGeorgesPrat ix namely, a theoretical approach that led to a formal model that can be verified using appropriate data and econometric methods. In this regard, I applied with my doctoral students the same methods that ProfessorAllaisappliedtohisstudents! Fredj: Q7. What’s your role on the Scientific Committee of the Maurice AllaisFoundation? Georges: The Maurice Allais Foundation was created thanks to his daughter Christine Allais, with the aim of raising awareness of her father’s contribution.Indeed,partofAllaisworkisnotwellknown,asitwas underlinedinthebookpublishedasearlyas1986byMarcelBoiteux, ThierrydeMontbrialandBertrandMunierentitled“Markets,capital anduncertainty”,whichincludesessaysinhonorofMauriceAllais.In particular,itisthecasefortheAllais’hereditaryandrelativistictheory of money supply and demand, as well his “fundamental equation of monetary dynamics”, even though the book published by Eric Barthalon in 2014 and the PhD by Ramzi Klabi defended at Aix Universitytwoyearsagoaimedtoshowtheoriginalityandimportance of this monetary theory. It is worth noting that Allais’s main work was written in French, so the Foundation wants to translate some of his texts into English, especially his famous book “Economy and Interest”. Otherwise, with the creation of the Maurice Allais Prize in Economics, the Foundation wants to encourage research carried out in line with Allais’s work and respecting his approach that is basedontheconfrontationoftheoreticalhypotheseswiththeobserved data, without conceptual or ideological preconceived ideas due to fashion effects. Like all the members of the Foundation’s Scientific Committee,I’mcommittedtoworkingwithintheseguidelines. Fredj: Q8.WhattypeofworkdoestheMauriceAllaisPrizejuryselect? Georges: Theprizehasbeenawardedeveryotheryearsince2013,andIhaveto say thattheprizewinners’workwasreally excellentandin line with Allais’sscientificapproachthatIrecalledearlier.Generallyspeaking, theworksubmitted(eitherpapersorbooks)dealswithconditionsof economicefficiencyandequilibrium,riskbehaviour,theoryofcycles, monetarytheoryandpolicy,internationaleconomicsandbehavioural economics. Obviously, when evaluating the applications, the jury looks for a clear and intrinsic originality of the ideas as well as a rigorous demonstration, and this is true whatever the publication support of the submitted work. For example, the fact that an article is published in the American Economic Review will not necessarily impressthejury.Theimpactofthesubmittedworkontheinternational scientificcommunityisalsotakenintoaccount.It’snotanecessityto quoteAllais amongthe authorsof the bibliography,althoughit is of course welcome. There’s no limit to the number of co-authorsfor a pieceofworksubmitted,evenifthejuryprefersalimitednumberof co-authors.Finally,toapplyforthisprize,therearesomenationality conditionsthataresetoutinthecharteroftheprize.