5 avenue Henry Le Chatelier
Institutional Affiliation: CREST
NBER Working Papers and Publications
|November 2018||Rationalizing Rational Expectations? Tests and Deviations|
with Xavier D'Haultfoeuille, Arnaud Maurel: w25274
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 datasets 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. Next, we go beyond testing by defining and estimating the minimal deviations from rational expectations that can be rationalized by the data. In the context o...