Publication Type

Working Paper

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

Singapore Management University

City or Country

Singapore

Copyright Owner and License

Authors

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Included in

Econometrics Commons

Share

COinS