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On a Graphical Technique for Evaluating Some Rational Expectations Models


  • Johansen Søren

    (University of Copenhagen)

  • Swensen Anders R

    (University of Oslo)


Campbell and Shiller (1987) proposed a graphical technique for the present value model, which consists of plotting estimates of the spread and theoretical spread as calculated from the cointegrated vector autoregressive model without imposing the restrictions implied by the present value model. In addition to getting a visual impression of the fit of the model, the purpose is to see if the two spreads are nevertheless similar as measured by correlation, variance ratio, and noise ratio. We extend these techniques to a number of rational expectation models and give a general definition of spread and theoretical spread. The main results are the asymptotic distributions of the variance ratio, noise ratio, and correlation between the estimated spread and theoretical spreads. We derive sup tests for the recursively calculated quantities. Finally, we illustrate the results by two previous studies by Campbell and Shiller (1987) and Engsted (2002).

Suggested Citation

  • Johansen Søren & Swensen Anders R, 2011. "On a Graphical Technique for Evaluating Some Rational Expectations Models," Journal of Time Series Econometrics, De Gruyter, vol. 3(1), pages 1-29, February.
  • Handle: RePEc:bpj:jtsmet:v:3:y:2011:i:1:n:9

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    References listed on IDEAS

    1. Peijie Wang, 2003. "Cycles and Common Cycles in Property and Related Sectors," International Real Estate Review, Asian Real Estate Society, vol. 6(1), pages 22-42.
    2. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
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