Test for Partial Rationality

Dong Soon Park
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Dong Soon Park: Seoul National University

Korean Economic Review, 1990, vol. 6, issue 1, 63-81

Abstract: We test for partial rationality of ASA-NBER surveys by examining whether participants optimally utilized the uncertainty which is one of important informations available at the time their forecasts were made. The ARCH-M model is employed in order to derive the conditional variances, which can be treated as a proxy of uncertainty in testing for partial rationality. It is shown that though direct data or price expectations reported in ASA-NBER Business Outlook surveys are largely free of bias, they are patially irrational and, of course, fully irrational relative to conventional symmetric loss function which is seen to be a special case of asymmetric loss functions. If the model for rationality test is specified well, a byproduct is to obtain the optimal forecasts using the survey forecasts.

Date: 1990
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