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

N. Gregory Mankiw and Matthew D. Shapiro

No 743, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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.

Keywords: Rational expectations; non-stationary time series; detrending; small sample bias (search for similar items in EconPapers)
Pages: 20 pages
Date: 1985-04
Note: CFP 637.
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Citations: View citations in EconPapers (3)

Published in Economics Letters (1986), 20: 139-145

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