Testing the restrictions implied by the rational expectations hypothesis

Dennis Hoffman, Peter Schmidt

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Abstract

The nature and form of the restrictions implied by the rational expectations hypothesis are examined in a variety of models with expectations and the properties of appropriate test statistics are analyzed with Monte Carlo evidence. Specifically, we consider the implications of lagged variables, simultaneous equations, and future period expectations upon the number and functional form of the rational expectations restrictions. Two asymptotically equivalent test statistics - a likelihood ratio and a Wald test - are available for implementing a test of these restrictions. Monte Carlo evidence is offered to provide a comparison between the properties of the alternative test statistics in small samples.

Original languageEnglish (US)
Pages (from-to)265-287
Number of pages23
JournalJournal of Econometrics
Volume15
Issue number2
DOIs
StatePublished - Feb 1981

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ASJC Scopus subject areas

  • Economics and Econometrics

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