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Do we reject too often? : Small sample properties of tests of rational expectations models

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  • Gregory Mankiw, N.
  • Shapiro, Matthew D.

Abstract

We examine the small sample properties of tests of rational expectations models. We show using Monte Carlo experiments that the asymptotic distribution of test statistics can be extremely misleading when the tine series examined are highly autoregressive. In particular, a practitioner relying on the asymptotic distribution will reject true models too frequently. We also show that this problem is especially severe with detrended data. We present correct small sample critical values for our canonical problem.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 20 (1986)
Issue (Month): 2 ()
Pages: 139-145

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Handle: RePEc:eee:ecolet:v:20:y:1986:i:2:p:139-145

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  1. Evans, G B A & Savin, N E, 1981. "Testing for Unit Roots: 1," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 753-79, May.
  2. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 2(2), pages 111-120, July.
  3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
  4. Flavin, Marjorie, 1984. "Time series evidence on the expectations hypothesis of the term structure," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 20(1), pages 211-237, January.
  5. Nelson, Charles R & Kang, Heejoon, 1981. "Spurious Periodicity in Inappropriately Detrended Time Series," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 741-51, May.
  6. Sawa, Takamitsu, 1978. "The exact moments of the least squares estimator for the autoregressive model," Journal of Econometrics, Elsevier, Elsevier, vol. 8(2), pages 159-172, October.
  7. Andrew B. Abel & Frederic S. Mishkin, 1981. "An Integrated View of Tests of Rationality, Market Efficiency, and the Short-Run Neutrality of Monetary Policy," NBER Working Papers 0726, National Bureau of Economic Research, Inc.
  8. Nelson, Charles R & Kang, Heejoon, 1984. "Pitfalls in the Use of Time as an Explanatory Variable in Regression," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 2(1), pages 73-82, January.
  9. Jones, David S. & Vance Roley, V., 1983. "Rational expectations and the expectations model of the term structure : A test using weekly data," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 453-465, September.
  10. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
  11. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  12. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 1057-72, June.
  13. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
  14. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  15. Evans, G B A & Savin, N E, 1984. "Testing for Unit Roots: 2," Econometrica, Econometric Society, Econometric Society, vol. 52(5), pages 1241-69, September.
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