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On a Graphical Technique for Evaluating Some Rational Expectations Models

Author

Listed:
  • Johansen Søren

    (University of Copenhagen)

  • Swensen Anders R

    (University of Oslo)

Abstract

Campbell and Shiller (1987) proposed a graphical technique for the present value model, which consists of plotting estimates of the spread and theoretical spread as calculated from the cointegrated vector autoregressive model without imposing the restrictions implied by the present value model. In addition to getting a visual impression of the fit of the model, the purpose is to see if the two spreads are nevertheless similar as measured by correlation, variance ratio, and noise ratio. We extend these techniques to a number of rational expectation models and give a general definition of spread and theoretical spread. The main results are the asymptotic distributions of the variance ratio, noise ratio, and correlation between the estimated spread and theoretical spreads. We derive sup tests for the recursively calculated quantities. Finally, we illustrate the results by two previous studies by Campbell and Shiller (1987) and Engsted (2002).

Suggested Citation

  • Johansen Søren & Swensen Anders R, 2011. "On a Graphical Technique for Evaluating Some Rational Expectations Models," Journal of Time Series Econometrics, De Gruyter, vol. 3(1), pages 1-29, February.
    • Handle: RePEc:bpj:jtsmet:v:3:y:2011:i:1:n:9
    DOI: 10.2202/1941-1928.1089
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    Cited by:

    1. Guillén, Osmani Teixeira & Hecq, Alain & Issler, João Victor & Saraiva, Diogo, 2015. "Forecasting multivariate time series under present-value model short- and long-run co-movement restrictions," International Journal of Forecasting, Elsevier, vol. 31(3), pages 862-875.
    2. Hecq, A.W. & Issler, J.V., 2012. "A common-feature approach for testing present-value restrictions with financial data," Research Memorandum 006, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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