Abstract
This paper shows that if agents have an asymmetric loss function, standard empirical tests for the rationality of their expectations are in general invalid. We further show that under a popular class of asymmetric loss functions, the linex family, a valid test can be carried out by estimating an appropriate ARCH-in-Mean model. The contrast between the standard test and our ARCH-M test is illustrated using the Goldsmith–Nagan forecasts of US Treasury bill yields.
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