Title

A Small-Sample Overlapping Variance-Ratio Test

Publication Type

Journal Article

Publication Date

2004

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 , the test under-rejects the null on the left tail seriously when the sample size is small. This 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

Publication

Journal of Time Series Analysis

Volume

25

Issue

1

First Page

127

Last Page

135

ISSN

0143-9782

Identifier

10.1046/j.0143-9782.2003.01804.x

Publisher

Wiley

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.

Additional URL

http://dx.doi.org/10.1046/j.0143-9782.2003.01804.x

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