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Testing rational expectations in a cointegrated VAR with structural change

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  • Marçal, Emerson Fernandes

Abstract

The rational expectation hypothesis is widely used in finance and macroeconomics. A research question investigates whether models using this hypothesis can fit the data well. Researchers have been developing econometric procedures to test rational expectation models. Sargent and Hansen (1991) proposed how to test exact rational expectation restrictions. This study aims to achieve three objectives. The first objective is to extend Johansen and Swensen’s framework that test exact rational expectation restrictions to the case where the data-generating process is a cointegrated vector autoregressive model with abrupt structural change (CVAR-SC). The second goal is to highlight that the type of rational expectation restrictions analysed in this paper imply co-breaking, as defined by Hendry and Mizon (1998). Finally, the restrictions on the CVAR-SC parameters implied by the present value model and expectation hypothesis of the interest rate term structure are analysed, derived and tested. Three empirical exercises are reported. The first is Engsted (2002)’s dataset on share prices and dividends, the second uses a Brazilian term structure data set and the third uses a North American term structure dataset.

Suggested Citation

  • Marçal, Emerson Fernandes, 2024. "Testing rational expectations in a cointegrated VAR with structural change," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003673
    DOI: 10.1016/j.irfa.2024.103435
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    More about this item

    Keywords

    Cointegration; Structural change; Rational expectation model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G00 - Financial Economics - - General - - - General

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