Photo Georges Prat

GEORGES PRAT

DIRECTEUR(TRICE) DE RECHERCHE ÉMÉRITE

Research interests

  • arrow_right Anticipations, incertitude et prix des actifs financiers
  • arrow_right Formation des anticipations de prix
  • arrow_right Primes de risque
  • arrow_right Cliométrie des salaires et du chômage

Research group

    Macroéconomie internationale, finance, matières premières et économétrie financière

Contact

2021-31

Modeling ex-ante risk premia in the oil market

Georges Prat, Remzi Uctum

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Abstract
Using Consensus Economics survey-based data we show that oil price expectations are not rational, implying that the ex-ante premium is a more relevant concept than the widely popular ex-post premium. We propose for the 3- and 12-month horizons a portfolio choice model with risky oil assets and a risk-free asset. At the maximized expected utility the risk premium is defined as the product of the risk price by the expected oil return volatility. We show that the representative investor can be risk averse or risk seeking depending on the state of nature, implying that the price of risk is positive or negative, respectively. The price of risk and expected volatility being unobservable magnitudes, a state-space model, where the risk prices are represented as stochastic unobservable components and where expected volatilities depend on historical squared returns, is estimated using Kalman filtering. We find evidence of significant disparities of risk prices according to horizons: higher amplitudes and risk seeking behaviour are associated with short horizons and lower fluctuations and risk aversion attitude characterize longer horizons. We show that macroeconomic, financial and oil market-related factors drive risk prices whose signs are consistent with the predictions of prospect theory. An upward sloped term structure of oil risk premia prevails in average over the period.
Mot(s) clé(s)
oil market, oil price expectations, ex-ante risk premium
2019-8

Equity Risk Premium and Time Horizon: what do the French secular data say ?

David Le Bris, Georges Prat

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Abstract
We consider a representative investor whose wealth is shared between a replica of the equity market portfolio and the riskless asset, and who maximizes the expected utility of their future wealth. For a given time-horizon, the solution of this program equalizes the required risk premium to the product of price of risk by the expected variance of stock returns. As a tentative to capture exogenous disturbing effects, the term spread of interest rates and US equity risk premia complement this relationship. Two traditional horizons are considered: the one-period-ahead horizon characterizing the ‘short-term’ investor and the infinite-time horizon characterizing the ‘long-term’ investor. For each horizon, expected returns are represented by mixing the three traditional adaptive, extrapolative and regressive process, expected variance is represented by a GARCH process, while the unobservable time-varying price of risk is estimated according to the Kalman filter methodology. Based on annual French data established by Le Bris and Hautcoeur (2010), large disparities in the dynamics of the short- and long term observed premia are evidenced from 1872 to 2018, while, due to risky arbitrage and transaction costs, the observed premia appeared to gradually converge towards their required values. Overall, although the French market had experienced very strong historical shocks, our model provides both measurements and explanations of French short- and long-term risk premia and so shed some additional light on the existence of a time-varying term structure of equity risk premia. Despite differences, results on the French market are rather in accordance with those by Prat (2013) based on US secular data.
Mot(s) clé(s)
equity risk premium, time horizon, France
2018-22

Understanding the long run dynamics of French unemployment and wages

Michel-Pierre Chélini, Georges Prat

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Abstract
A standard specification of the WS-PS model based on wage bargaining between unions and firms makes it possible to understand the main features of long-term dynamics of unemployment and wages in France at the macroeconomic level. This result is conditional on auxiliary hypotheses made on the representations of the degree of rigidity in the labour market (depicted by a stochastic state variable), of the reservation wage (depending on the legal minimum wage), and on the nature of “other factors” pertaining to wages and prices that are not a priori specified in the WS-PS theoretical framework (summarized by the output gap). We find that the observed unemployment adjusts gradually to its equilibrium value, which is composed of three components: a “chronic” component due to the repartition in the added-value (real reservation wage, social contributions, productivity, profit margins of companies), a “cyclical” component depending on the output gap, and a “frictional” component due to the imperfect mobility of labour and technical progress. The observed wage also adjusts gradually to its negotiated value, the latter depending on the reservation wage, the social contributions, the price level, the labor productivity, the profit margins of companies, the unionization rate and on the unemployment rate whose influence is time-varying. Our results suggest that, in the average, the power of firms dominates that of unions during the negotiations, while, as predicted by the theory, change in employment intervenes effectively in the adjustment between wage desired by employees and wage offered by employers to achieve equilibrium.
Mot(s) clé(s)
equilibrium unemployment, wages, France
2018-25

Term structure of interest rates: modelling the risk premium using a two horizons framework

Georges Prat, Remzi Uctum

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Abstract
This paper proposes a hybrid two-horizon risk premium model with one- and two-period maturity debts, among which the risky asset and the riskless one depend on agents’ investment horizon. A representative investor compares at each horizon the ex-ante premium offered by the market with the value they require to take a risky position, with the aim of choosing between a riskless and a risky strategy. Due to market frictions, the premium offered adjusts gradually to its required value determined by the portfolio choice theory. The required market risk premium is defined as a time-varying weighted average of the required 1- and 2-period horizon premia, where the weights represent the degree of preference of the market for each of the horizons. Our framework is more general than the standard model of the term structure of interest rates where it is assumed that the 1-period rate is the riskless rate at any time and for all agents. Setting one period equal to three months, we use 3-month ahead expected values of the US 3-month Treasury Bill rate provided by Consensus Economics surveys to estimate our 3- and 6-month horizon risk premium model using the Kalman filter methodology. We find that both 3- and 6-month maturity rates represent the riskless and the risky rates with a time-varying market preference for the former rate of about two-thirds. This result strongly rejects the standard model and shows the importance of taking into account the market preference for alternative horizons when describing risky strategies in interest rate term structure modelling.
Mot(s) clé(s)
interest rates, risk premium, survey data
2016-19

Do markets learn to rationally expect US interest rates? Evidence from survey data

Georges Prat, Remzi Uctum

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Abstract
Using Consensus Economics survey data on the US 3-month bill rate and the 10 years Treasury bonds expectations for the 3- and 12-month horizons over the period November 1989 – May 2015, this article aims at testing whether a group of rational forecasters coexists with or emerges over time beside a group of forecasters employing the traditional limited information-based rules that are the extrapolative, the adaptive, the regressive and the forward-market premium rules. We estimate the time-varying weights associated with the two groups using the Kalman filter methodology and find that the aggregate expectations fail to exhibit a learning process towards rationality both for short term and long term interest rates. While long term interest rate expectations appear to be explained only by limited information rules at any time, in the case of the short term interest rate a group of rational agents seems to have operated in the market over the whole period with a small but almost constant weight simultaneously with limited information-based forecasters. Overall, for both short and long term interest rates, our results strongly suggest that experts’ forecasts are essentially based on a combination of the four traditional processes. This is consistent with the economically rational expectations theory which suggests that information costs and agents’ aversion to misestimating future interest rates determine the optimal amounts of information on which they base their expectations.
Mot(s) clé(s)
expectation formation, interest rates, dynamic heterogeneity, survey data.
2015-30

Rueff, Allais, et le chômage d’équilibre

Georges Prat

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Abstract
The « permanent » unemployment concept of Rueff (1925, 1931) represents a classical form of unemployment due to wage rigidities leading to an excess of real wages compared to their theoretical value corresponding to a competitive equilibrium. Relative to this known aspect of the Rueff’s work, this paper shows that the author considered also a “temporary” unemployment due to an insufficient level of the economic activity, and a « minimum » frictional unemployment prevailing in the normal functioning of any economy. Using empirical data in England during the 1920’s, Rueff suggested that the « permanent » component was the main explanation of the unemployment (this is the socalled « law of Rueff »). We conduct simple econometric tests using Rueff’s data that confirm this conclusion, and we show that releasing the assumption of a constant labor productivity (supposed by Rueff) improves the « law of Rueff ». In line with these results, we show that the theoretical approach proposed by Allais (1943) joins the three types of unemployment pointed out by Rueff, renamed as “chronic”, “conjonctural” and “technological”, respectively. Much later, Allais (1980) proposed an unrecognized straightforward econometrical equation comprising these three types of unemployment to represent the french unemployment over the period 1952-78. We confirm that this equation describes a large part of the evolution of unemployment in England during the 1920’s and in France during the period 1970-2008, although the properties of residuals show that this equation is misspecified. Finally, we suggest that, under some restrictive conditions, the three types of unemployment distinguished by Rueff and Allais can be seen from the perspective of the equilibrium unemployment defined by the imperfect competition WS-PS model (Layard-Nickel-Jackman (1991)), hence allowing to indicate how the Allais’ equation is misspecified, thus highlighting the important scientific advances that have been made since.
Mot(s) clé(s)
equilibrium unemployment, wage rigidities, Maurice Allais, Jacques Rueff
2015-16

Equity Prices and Fundamentals: a DDM-APT Mixed Approach

Fredj Jawadi, Georges Prat

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Abstract
This paper focuses on the linkages between equity prices and fundamentals for 27 individual shares from the French stock price index (CAC40). To assess fundamental value, the traditional Dividend Discount Model (DDM) equities’ valuation principle is coupled with the Portfolio Choice Theory based on the Arbitrage Pricing Theory (APT). This yields a general equity valuation relationship for which the APT determines the long-term risk premium included in the DDM. Interestingly, restrictions are less significant than in the usual approaches since the number of risk premium factors is not limited a priori by the theory. Accordingly, our empirical results point to two major findings. On the one hand, while results in the literature based on the DDM showed that fundamental value dynamics are very smooth with respect to stock price indices, our DDM-APT model reproduces both trends and major share price fluctuations. On the other hand, a simple linear Error Correction Model (ECM) highlighted a mean-reversion process of equity prices towards their fundamental values.
Mot(s) clé(s)
Stock valuation; equity risk premium; stock price adjustment.
2014-17

Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data

Georges Prat, Remzi Uctum

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Abstract
Using Consensus Economics survey data on JPY/USD and GBP/USD exchange rate expectations for the 3- and 12-month horizons over the period November 1989 – December 2012 we first show that expectations fail to unbiasedness tests and do not exhibit a learning process towards rationality. Our approach is consistent with the economically rational expectations theory (Feige and Pearce, 1976), which states that information costs and agents’ aversion of misestimating future exchange rates determine the optimal amounts of information on which they base their expectations. The time-variability of the cost/aversion ratios justifies at the aggregate level a representation of expectations as a linear combination of the traditional extrapolative, adaptive and regressive processes augmented by a forward market component, whose parameters are allowed to change over time. This mixed expectation model with unstable heterogeneity is validated by our Kalman Filter estimation results for the two currencies and the two horizons considered. Although the chartist behavior, gathering the extrapolative and adaptive components, appears to dominate the fundamentalist behavior, described by the regressive and forward market components, the relative importance of the fundamentalists (chartists) is found to increase (decrease) with the time-horizon.
Mot(s) clé(s)
expectation formation, exchange rates, dynamic heterogeneity, survey data.
2014-1

Rueff et l’analyse du chômage : Quels héritages?

Georges Prat

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Abstract
This paper shows that, Rueff (1925, 1931) distinguished [a] a « permanent » unemployment due to excessive real wages relative to the labor productivity, [b] a “temporary” unemployment due to a decline in the economic activity resulting from a cyclic decrease of the price level, and [c] a « minimum » frictional unemployment prevailing in the normal functioning of the economy. Using empirical data, Rueff suggested that the unemployment of type [a] was largely dominant in England during the 1920’s (i.e. the socalled « law of Rueff »). The confrontation between this analysis and the subsequent analysis of unemployment in the literature reveals that : (i) the Phillips curve and its extension with the NAIRU appears as a non-legacy ; (ii) the wage curve is in accordance with the « law of Rueff » and provides an interesting complement to it; (iii) the equation proposed by Allais to explain the french unemployment rate includes the three types of unemployment pointed out by Rueff; (iv) although now abandoned, the fixed price temporary equilibria theory includes the unemployment of type [a] with both the classical regime and the keynesian regime of unemployment ; (v) the new keynesian microeconomy of the labor market shows that unemployment of type [a] can be explained by the behavior of rational agents without involving rigidities imposed by the Government ; this result generalizes the concept of unemployment of type [a] but is a refutation of the possibility accepted by Rueff to get a competitive equilibrium in a labor market without exogenous rigidities; (vi) the imperfect competition WS-PS model based on negotiation between employees and employers appears in accordance with the three kinds of unemployment [a], [b] et [c] so that it can be seen in this model a synthesis joining Rueff and Allais.
Mot(s) clé(s)
unemployment, wage rigidities, Jacques Rueff
2013-36

Persistence of announcement effects on the intraday volatility of stock returns: evidence from individual data

Sylvie Lecarpentier-Moyal, Georges Prat, Patricia Renou-Maissant, Remzi Uctum

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Abstract
We analyze the empirical relationship between announcement effects and return volatilities of four CAC40 companies using intraday financial and event data from SBF-Euronext and Bloomberg, respectively. We estimate the daily component of the intraday volatility using a FIGARCH model and the intraday seasonality by the Fourier Flexible Form. We find that individual return volatilities are affected by a systematic market effect, day effects and announcements related to macroeconomic environment, strategic and financial dealings and commercial outcome, the two latter events being specific to the firm or to its competitors. The volatility responses have delayed and progressive patterns with persistence horizons ranging from one to three hours, suggesting that agents access to complete information gradually.
Mot(s) clé(s)
Intraday volatility, long memory, persistence of announcement effects
2013-17

Cliométrie du modèle WS-PS en France

Michel-Pierre Chélini, Georges Prat

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Abstract
From a macroeconomic perspective and in accordance with the Wage Setting – Price Setting model (WS-PS, Layard - Nickel - Jackman (1991)), this paper aims to give a simple and simultaneous representation of the dynamics of the unemployment rate and the wage rate in France over the period of 1950-2008. Distinguishing the price level at which employees refer and the price set by employers, and subject to complementary assumptions about factors supposed but not specified in the WS-PS system, we show that the equilibrium rate of unemployment is made of a chronic component due to an excess of the real labor cost comparing to productivity, by a conjunctural component characterized by the output gap (as like the Okun law) and by a structural component including voluntary, frictional and technological factors, represented by a stochastic state variable. The social cost of unemployment implies that the observed rate of unemployment adjusts gradually towards its equilibrium value, the latter depending on the time varying degree of rigidity of employment. The rate of wage equation is supposed given by a weighted average of the WS and PS equations. As a result, the wage rate depends on the levels of price and productivity, of the margin of companies and of the rate of unemployment rate. At the empirical level, estimations are made simultaneously for the unemployment and wages with a space-state model based on the Kalman filter method allowing for the introduction of time varying coefficients characterizing the degree of rigidity of employment. In accordance with this framework, we found that the rate of unemployment tends to adjust gradually to its equilibrium level within 2.7 years and that the degree of rigidity is a time varying phenomenon. The estimated components of the equilibrium unemployment rate indicate that the chronic component is negative until 1974, hence compensating the other components and allowing to understanding the very low values (under 2%) of the unemployment rate observed during these years. After 1974, the chronic component increases to get a maximum of 6.7% in 1993, then decreasing to reach about 4% in 2008. The conjunctural component exhibits numerous minima and maxima from zero in 1973 to 4% in 1993, to reach about 2% in 2008. As expected, the structural component is smoother than the two others and ranges between 0.5% and 4% and reach about 2% in 2008. As expected, the dynamics of wages depend of a weighted average consumer and wholesale prices and of the productivity with elasticities near unity, on the margin of companies and on the rate of unemployment with a sensibility which is time varying, depending on the relative importance attributed by employees and employers to unemployment during the negotiations. Our outcomes also suggest that the bargaining powers of employees and employers are rather balanced in the average over the whole period.
Mot(s) clé(s)
unemployment rate, wages, french economy
2012-29

Modeling the horizon-dependent risk premium in the forex market: evidence from survey data

Georges Prat, Remzi Uctum

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Abstract
Using Consensus Economics survey data on experts' expectations, we aim to model the 3- and 12-month ahead ex-ante risk premia on the Yen/USD and the British Pound/USD exchange markets. For each market and at a given horizon, we show that the risk premium is well determined by the conditional expected variance of the change in the real exchange rate, agents' real net market position in assets and a constant composite risk aversion coefficient, as suggested by a two-country portfolio asset pricing model. The expected variance depends on the past values of the observed variance and the unobservable real net market position is estimated as a state variable using the Kalman filter methodology. We found that the trends of our estimated horizon-specific net market positions are consistent with the ones of the observed short term aggregate net market positions calculated using the U.S. Treasury International Capital System dataset. Moreover, we show that the ex-post premia tend to adjust towards the ex-ante values, suggesting that experts' beliefs provide a relevant information to the market. These results bring new responses to the difficulties reported by the widespread ex-post risk premium literature and enhances the usefulness of survey data in modelling the risk premium.
Mot(s) clé(s)
risk premium; foreign exchange market; international asset pricing model; survey data
2011-29

Cliométrie du chômage et des salaires en France, 1950-2008

Michel-Pierre Chélini, Georges Prat

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Abstract
From a macroeconomic perspective, this paper aims to represent the dynamics of the unemployment rate and of the variations of wages in France over the period of 1950-2008. On a theoretical level, the unemployment equation distinguishes a chronic factor characterized by an excess of real wages compared to the labor productivity gains, a conjunctural factor characterized by the difference between the growth rate of the production and its long term value, and a structural factor including frictional, technological and voluntary components of the unemployment. The wages' variations are classically supposed to depend on productivity gains and inflation. On the empirical level, estimations are made simultaneously for the unemployment and wages with a Space-State model based on the Kalman filter methodology. This econometric approach allows for the introduction of time varying parameters. In accordance with these hypotheses, the unemployment rate is shown to depend on the excess of the real hourly labor cost over the marginal productivity of labor (with a time varying sensibility), on the growth rate of the real GDP and on a structural component, which is about 4%. The chronic unemployment rate appeared in the beginning of the 1970s; at this time, it progressively increases to reach a maximum of 7.8% in 1994, then decreases to fall below 2% in 2008. The conjunctural component is in conformity with the Okun's law since it links negatively the unemployment rate with the production growth rate, this factor seeming to develop particularly after the 1973 oil shock. In addition, the results indicate a delayed influence of the above-mentioned factors on the unemployment, with an average period of influence of 3.3 years. Concerning wages, as expected, the rate of change in nominal wages is shown to be determined by the growth rate in productivity and by the inflation rate as well. The wages' elasticity with respect to price level appears to be time -varying, with a value close to the unit at the beginning of the period and ending up with a value close to zero by the end. This result must be connected with deflation, price/wage de-indexation, and labor unions' decreasing influence that are observed during the period.
Mot(s) clé(s)
rate of unemployment, wages, French Economy
2010-22

Equity Risk Premium and Time Horizon : What do the U.S. Secular Data Say ?

Georges Prat

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Abstract
An ex-ante equity risk premium is the difference between the expected return of a risky asset at time t for a given future time horizon and an equivalent maturity risk-free interest rate. Using annual US secular data from 1871 to 2008, this study aims to model simultaneously the measures and the explanations of ex-ante equity risk premia for two polar horizons: the one period ahead horizon (i.e. the "short term" premium) and the infinite time horizon (i.e. the "long term" premium). Expectations being represented by traditional adaptive processes, large disparities in the dynamics of the two premia are evidenced. According to the conditional CAPM, each premium is at time t explained by the product of the price of risk by the expected variance of returns, these two magnitudes being horizon dependant. The expected variances depend on the past values of the centered squared returns (we found 5 and 8 years for the one year and the infinite horizon, respectively). For each horizon, the price of risk is determined by a spread of interest rates capturing economic factors of uncertainty and by an unobservable variable determined according to the kalman filter methodology (i.e. a state variable). The state variables are supposed to capture the influence of hidden variables and of non directly measurable psychological effects. The model gives a valuable representation of the "short term" and "long term" premia.
Mot(s) clé(s)
equity risk premium, time horizon
2009-28

Modelling oil price expectations: evidence from survey data

Georges Prat, Remzi Uctum

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Abstract
Using Consensus Forecast survey data on WTI oil price expectations for three and twelve month horizons over the period November 1989 – December 2008, we find that the rational expectation hypothesis is rejected and that none of the traditional extrapolative, regressive and adaptive processes fits the data. We suggest a mixed expectation model defined as a linear combination of these traditional processes, which we interpret as the aggregation of individual mixing behavior and of heterogenous groups of agents using simple processes. This approach is consistent with the economically rational expectations theory. We show that the target price included in the regressive component of this model depends on macroeconomic fundamentals whose effects are subject to structural changes. The estimation results led to validate the mixed expectational model for the two horizons.
Mot(s) clé(s)
Expectations formation, oil price
2009-25

The dynamics of U.S. equity risk premia: lessons from professionals'view

Alain Abou, Georges Prat

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Abstract
Semi-annual surveys carried out by J. Livingston on a panel of experts have enabled us to compute the expected returns over the time span 1-semester and 2-semesters ahead on a portfolio made up of US industrial stocks. We calculated about 3000 individual ex-ante equity risk premia over the period 1952 to 1993 (82 semesters) defined as the difference between these expected stock returns and the risk-free forward rate given by zero coupon bonds. Unlike any other study, our contribution is to analyse premia deduced from surveys data, at the micro level, per date and over a long period. Three main conclusions may be drawn from our analysis of these ex-ante premia. First, the mean values of these premia are closer to the predictions derived from the consumption-based asset pricing theory than the ones obtained for the ex-post premia. Second, the experts' professional affiliation appears to be a significant criterion in discriminating premia. Third, in accordance with the Arbitrage Pricing Theory, individual ex-ante premia depend both on macroeconomic and idiosyncratic common factors: the former are represented by a set of macroeconomic variables observable by all agents, and the latter by experts’ personal forecasts about the future state of the economy, as defined by expected inflation and industrial production growth rate.
Mot(s) clé(s)
Stock price expectations, equity risk premium, survey micro data
2009-23

Fisher, Macaulay et Allais face au "Paradoxe de Gibson"

Jean-Jacques Durand, Georges Prat

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Abstract
According to the quantitative theory of money, an expansion of the money supply leads both to a decrease of interest rates and an increase of the general level of good prices. This negative correlation expected between these two variables being contradicted by the positive correlation observed – pointed out by Gibson and confirmed by further studies - Keynes refers to the so-called “Gibson’s paradox”. I. Fisher proposed an explanation of this “paradox” with the slowness of the adjustments of interest rates to the rate of change in the general price level. However, F.R. Macaulay showed that, since the delays found by Fisher go up far in the past, this implies a necessary correlation between the price level and the weighted average of past rates of change in the price level found by Fisher. This arises the following question: does the correlation between interest rates and the price level result from a fisherian behaviour of agents or, on the contrary, do Fisher’s results are spurious since due to the correlation between price level and interest rates? However, Macaulay’s criticism loses its relevance when the delays are short, as observed during periods of hyperinflation and after the Second World War. With respect to this debate, the merit of the Allais’ Hereditary and Relativist (HR) theory is to suggest a synthesis with his “psychological rate of interest” hypothesis. Depending on past values of the rate of change in price level and production, this latter, which equals the “rate of forgetfulness”, represents the general trend of market interest rates. When the memory is long (i.e. the “rate of forgetfulness” is weak), the psychological rate of interest is necessarily correlated with the price level and then explains the positive correlation – which may be more or less stable due to the production effects – between market interest rates and the price level. But when the memory is short (i.e. the rate of forgetfulness high), the HR theory implies both the disappearance of the correlation between interest rate and the price level and the existence of a positive correlation between interest rate and the rate of change in the price level.
Mot(s) clé(s)
Interest rates, price level, inflation
2009-21

Nonlinear Stock Price Adjustment in the G7 Countries

Fredj Jawadi, Georges Prat

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Abstract
This paper seeks to address the stock price adjustment toward fundamentals. Using the class of Switching Transition Error Correction Models (STECMs), we show that two regimes describe the dynamics of stock price deviations from fundamentals in the G7 countries over the period 1969-2005. Deviations appear to follow a quasi random walk in the central regime when prices are near fundamentals (i.e. transaction costs being greater than expected gains, the mean reversion mechanism is inactive), while they approach a white noise in the outer regimes (i.e. transaction costs being lower than expected gains, the mean reversion works). As expected when transaction costs are heterogeneous, the STECM shows that stock price adjustments are smooth, implying that the convergence speed is time-varying according to the size of the deviation. Finally, using appropriate indicators, both the magnitudes of under- and overvaluation of stock price and the speed of the mean reversion are exhibited per date in the G7 countries, showing that the dynamics of stock price adjustment is highly dependent on the date and on the country under consideration.
Mot(s) clé(s)
Price, heterogeneous transaction costs, STECMs
2008-2

The dynamics of ex-ante risk premia in the foreign exchange market:Evidence from the yen/usd exchange rate Using survey data

Georges Prat, Remzi Uctum

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Abstract
Using financial experts' Yen/USD exchange rate expectations provided by
Consensus Forecasts surveys (London), this paper aims to model the 3 and 12-month ahead
ex-ante risk premia measured as the difference between the expected and forward exchange
rates. According to a two-country portfolio asset pricing model, the risk premium is modeled
as the product of three factors: a constant risk aversion coefficient, the expected variance of
the rate of change in the real exchange rate, and the spread between domestic agent's market
position in foreign assets and foreign agent's market position in domestic assets (net market
position). When the returns are partially predictable, the expected variance is horizondependent
and this is a sufficient condition for agents not to require at any time a unique risk
premium for all maturities but a set of premia scaled by the time horizon of the investment.
For each horizon the expected variance is assumed to depend on the historical values of the
variance and on the unobservable maturity-dependent net market positions which have been
estimated through a state space model using the Kalman filter methodology. We find that the
model explains satisfactorily both the common and the non-random specific time-patterns of
the 3- and 12-month ex-ante premia.
Mot(s) clé(s)
risk premium – foreign exchange market – international asset pricing model
2006-11

Anticipations, prime de risque et structure par terme des taux d'intérêt : une analyse des comportements d'experts

Georges Prat, Remzi Uctum

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Abstract
Using Consensus Forecasts monthly surveys, we show that experts' interest rate expectations in the Eurofranc market do not verify the rational expectations hypothesis. Instead, these expectations are found to be generated by a mixed process combining the traditional adaptive, regressive and extrapolative processes augmented by macroeconomic effects (price, income, money). This mixed expectational process is shown to verify the term structure relation of interest rates based on the portfolio choice model, where a state-space representation is introduced to account for the unobservable part of the long term asset in the portfolio: (i) the risk premium depends on the variance of the short term asset and on the covariance between the latter and inflation, and (ii) the estimated values of the term structure parameter and of the risk aversion coefficient are in accordance with their theoretical values. Nevertheless, due to transaction costs, the adjustment of the market rates on the portfolio equilibrium relation occurs gradually.
Mot(s) clé(s)
term structure of interest rates, expectations, risk premium
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