1 Department of Economics, Faculty of Social Sciences, Københavns Universitet2 Økonomisk Institut, Department of Economics, Faculty of Social Sciences, Københavns Universitet3 University of Oslo4 Økonomisk Institut, Department of Economics, Faculty of Social Sciences, Københavns Universitet5 University of Oslo
Campbell and Shiller (1987) proposed a graphical technique for the present value model, which consists of plotting estimates of the spread and theoretical spread as calculated from the cointegrated vector autoregressive model without imposing the restrictions implied by the present value model. In addition to getting a visual impression of the fit of the model, the purpose is to see if the two spreads are nevertheless similar as measured by correlation, variance ratio, and noise ratio. We extend these techniques to a number of rational expectation models and give a general definition of spread and theoretical spread. The main results are the asymptotic distributions of the variance ratio, noise ratio, and correlation between the estimated spread and theoretical spreads. We derive sup tests for the recursively calculated quantities. Finally, we illustrate the results by two previous studies by Campbell and Shiller (1987) and Engsted (2002).
Journal of Time Series Econometrics, 2011, Vol 3, Issue 1