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Expectations Hypotheses Tests and Predictive Regressions at Long Horizons

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  • Rossi, Barbara

Abstract

Many rational expectations models state that an economic variable is determined as the present value of future variables. These restrictions have traditionally been tested on VARs where variables appear either in levels (or cointegrating relationships) or first differences. Commonly used test statistics may lead to over-rejections in small samples in the presence of highly persistent variables. Similar problems occur in longhorizon predictive regressions. We propose an alternative method based on local-tounity asymptotic approximations. We apply this method to long-horizon Predictive Regressions, Uncovered Interest Rate Parity, the Term Structure, and the Permanent Income Hypothesis.

Suggested Citation

  • Rossi, Barbara, 2005. "Expectations Hypotheses Tests and Predictive Regressions at Long Horizons," Working Papers 05-03, Duke University, Department of Economics.
    • Handle: RePEc:duk:dukeec:05-03
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    Cited by:

    1. Alex Maynard, 2006. "The forward premium anomaly: statistical artefact or economic puzzle? New evidence from robust tests," Canadian Journal of Economics, Canadian Economics Association, vol. 39(4), pages 1244-1281, November.

    More about this item

    Keywords

    expectation hypotheses; present value models; long-horizon; local to unity;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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