Do We Reject Too Often? Small Sample Properties of Tests of Rational Expectations Models / N. Gregory Mankiw, Matthew D. Shapiro.

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Mankiw, N. Gregory

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Material type: Text

TextSeries: Technical Working Paper Series (National Bureau of Economic Research) ; no. t0051.Publication details: Cambridge, Mass. National Bureau of Economic Research 1985.Description: 1 online resource: illustrations (black and white)Online resources:

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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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October 1985.

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.