Rationalizing rational expectations: characterizations and tests

Xavier D'Haultfoeuille, Christophe Gaillac and Arnaud Maurel

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Abstract: In this paper, we build a new test of rational expectations based on the marginal distributions of realizations and subjective beliefs. This test is widely applicable, including in the common situation where realizations and beliefs are observed in two dierent datasets that cannot be matched. We show that whether one can rationalize rational expectations is equivalent to the distribu- tion of realizations being a mean-preserving spread of the distribution of beliefs. The null hypothesis can then be rewritten as a system of many moment inequal- ity and equality constraints, for which tests have been recently developed in the literature. The test is robust to measurement errors under some restrictions and can be extended to account for aggregate shocks. Finally, we apply our methodology to test for rational expectations about future earnings. While individuals tend to be right on average about their future earnings, our test strongly rejects rational expectations.

Keywords: Rational expectations; Test; Subjective expectations; Data; combination. (search for similar items in EconPapers)
Date: 2021-07
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Citations: View citations in EconPapers (12)

Published in Quantitative Economics, 2021, 12 (3), pp.817-842. ⟨10.3982/qe1724⟩

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Related works:
Journal Article: Rationalizing rational expectations: Characterizations and tests (2021)
Working Paper: Rationalizing Rational Expectations: Characterizations and Tests (2021)
Working Paper: Rationalizing Rational Expectations: Characterization and Tests (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03346328

DOI: 10.3982/qe1724

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