Do We Reject Too Often? Small Sample Properties of Tests of Rational Expectations Models
14 Pages Posted: 2 Jan 2007 Last revised: 23 Aug 2024
Date Written: October 1985
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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