The null distribution of the overlapping variance-ratio (OVR) test of the random-walk hypothesis is known to be downward biased and skewed to the right in small samples. As shown by Lo and MacKinlay (1989), the test under-rejects the null on the left tail seriously when the sample size is small. This property adversely affects the applicability of the OVR test to macroeconomic time series, which usually have rather small samples. In this paper, we propose a modified overlapping variance-ratio statistic and derive its exact mean under the normality assumption. We propose to approximate the small-sample distribution of the modified statistic using a beta distribution that matches the (exact) mean and the (asymptotic) variance. A Monte Carlo experiment shows that the beta approximation performs well in small samples. Copyright 2004 Blackwell Publishing Ltd.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.