Formulating wald tests of the restrictions implied by the rational expectations hypothesis

Abstract In this paper, we examine the small sample properties of alternative formulations of Wald tests of non‐linear restrictions implied by the rational expectations hypothesis. A Monte Carlo analysis is presented as well as an example using Canadian aggregate time series data. The evidence indicates that Wald test results are extremely sensitive in small samples to the way in which the non‐linear restrictions in such models are parameterized, with a multiplicative form yielding tests of most accurate size. Least squares degrees of freedom adjustments also improve the sample performance of the tests.