Randomization Tests in Econometrics

Numerous shuffling of data produce a distribution of test statistic values that can be used to assess the degree to which the test statistic value produced by the actual data is unusual. Because this controversial randomization testing methodology, made practical by the computer revolution, has begun to appear in applied econometric studies, econometricians should become familiar with its mechanics, rationale, and interpretation, all of which are quite different from the status quo. This paper exposits randomization tests in an econometric context, discusses their advantages, and alerts practitioners to pitfalls.