Skip to main content

Rationalizing rational expectations: Characterizations and tests

Publication ,  Journal Article
D'Haultfoeuille, X; Gaillac, C; Maurel, A
Published in: Quantitative Economics
July 2021

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 different data sets that cannot be matched. We show that whether one can rationalize rational expectations is equivalent to the distribution 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 inequality 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.

Duke Scholars

Altmetric Attention Stats
Dimensions Citation Stats

Published In

Quantitative Economics

DOI

ISSN

1759-7323

Publication Date

July 2021

Volume

12

Issue

3

Start / End Page

817 / 842

Publisher

The Econometric Society

Related Subject Headings

  • 3802 Econometrics
  • 3801 Applied economics
  • 1403 Econometrics
 

Citation

APA
Chicago
ICMJE
MLA
NLM
D’Haultfoeuille, X., Gaillac, C., & Maurel, A. (2021). Rationalizing rational expectations: Characterizations and tests. Quantitative Economics, 12(3), 817–842. https://doi.org/10.3982/qe1724
D’Haultfoeuille, Xavier, Christophe Gaillac, and Arnaud Maurel. “Rationalizing rational expectations: Characterizations and tests.” Quantitative Economics 12, no. 3 (July 2021): 817–42. https://doi.org/10.3982/qe1724.
D’Haultfoeuille X, Gaillac C, Maurel A. Rationalizing rational expectations: Characterizations and tests. Quantitative Economics. 2021 Jul;12(3):817–42.
D’Haultfoeuille, Xavier, et al. “Rationalizing rational expectations: Characterizations and tests.” Quantitative Economics, vol. 12, no. 3, The Econometric Society, July 2021, pp. 817–42. Manual, doi:10.3982/qe1724.
D’Haultfoeuille X, Gaillac C, Maurel A. Rationalizing rational expectations: Characterizations and tests. Quantitative Economics. The Econometric Society; 2021 Jul;12(3):817–842.

Published In

Quantitative Economics

DOI

ISSN

1759-7323

Publication Date

July 2021

Volume

12

Issue

3

Start / End Page

817 / 842

Publisher

The Econometric Society

Related Subject Headings

  • 3802 Econometrics
  • 3801 Applied economics
  • 1403 Econometrics