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Do We Reject Too Often? Small Sample Bias in Tests of Rational Expectations

Author

Listed:
  • N. Gregory Mankiw

    (Harvard University)

  • Matthew D. Shapiro

Abstract

We examine the small sample properties of tests of rational expectations models. We show using Monte Carlo experiments that these tests can be extremely biased toward rejection for sample sizes typical in applied research. These biases are important when the time series examined are highly autoregressive. We also show that these tests are even more biased with detrended data. We present correct small sample critical values for our canonical problem.

Suggested Citation

  • N. Gregory Mankiw & Matthew D. Shapiro, 1985. "Do We Reject Too Often? Small Sample Bias in Tests of Rational Expectations," Cowles Foundation Discussion Papers 743, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:743
    Note: CFP 637.
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d07/d0743.pdf
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    Citations

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    Cited by:

    1. N. Gregory Mankiw & David Romer & Matthew D. Shapiro, 1991. "Stock Market Forecastability and Volatility: A Statistical Appraisal," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 455-477.
    2. Leonardo Bartolini & Gordon M. Bodnar, 1996. "Are exchange rates excessively volatile? And what does \\"excessively volatile\\" mean, anyway?," Research Paper 9601, Federal Reserve Bank of New York.
    3. Smith, David C., 1999. "Finite sample properties of tests of the Epstein-Zin asset pricing model," Journal of Econometrics, Elsevier, vol. 93(1), pages 113-148, November.

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