Publication Type
Working Paper
Version
publishedVersion
Publication Date
1-2002
Abstract
The null distribution of the overlapping variance-ratio (OVR) test of the random-walk hypothesis is known to be downward biased and skewed to the right in small samples. As shown by Lo and MacKinlay (1989), the test under-rejects the null on the left tail seriously when the sample size is small. This unfortunate property adversely affects the applicability of the OVR test to macroeconomic time series, which usually have rather small samples. In this paper we propose a modified overlapping variance-ratio statistic and derive its exact mean under the normality assumption. We propose to approximate the small-sample distribution of the modified statistic using a Beta distribution that matches the (exact) mean and the (asymptotic) variance. A Monte Carlo experiment shows that the Beta approximation performs well in small samples.
Keywords
Beta distribution, Monte Carlo experiment, random-walk hypothesis, variance-ratio test
Discipline
Econometrics
Research Areas
Econometrics
First Page
1
Last Page
13
Publisher
SMU Economics and Statistics Working Paper Series, No. 01-2002
City or Country
Singapore
Citation
TSE, Yiu Kuen; NG, K. W.; and ZHANG, Xibin.
A Small-Sample Overlapping Variance-Ratio Test. (2002). 1-13.
Available at: https://ink.library.smu.edu.sg/soe_research/1131
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Comments
Published in Journal of Time Series Analysis, 2004, 25 (1), pp. 127-135. https://doi.org/10.1046/j.0143-9782.2003.01804.x