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Robust Covariance Matrix Estimation with Data-Dependent VAR Prewhitening Order

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  • den Haan, Wouter J.
  • Levin, Andrew T

Abstract

This paper analyzes the performance of heteroskedasticity-and-autocorrelation-consistent (HAC) covariance matrix estimators in which the residuals are prewhitened using a vector autoregressive (VAR) filter. We highlight the pitfalls of using an arbitrarily fixed lag order for the VAR filter, and we demonstrate the benefits of using a model selection criterion (either AIC or BIC) to determine its lag structure. Furthermore, once data-dependent VAR prewhitening has been utilized, we find negligible or even counter-productive effects of applying standard kernel-based methods to the prewhitened residuals; that is, the performance of the prewhitened kernel estimator is virtually indistinguishable from that of the VARHAC estimator.

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Bibliographic Info

Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt0127m2tp.

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Date of creation: 01 Jun 2000
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Handle: RePEc:cdl:ucsdec:qt0127m2tp

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Keywords: VAR; covariance matrix estimation;

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References

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  1. repec:att:wimass:9220 is not listed on IDEAS
  2. Martin S. Eichenbaum & Lars Peter Hansen & Kenneth J. Singleton, 1986. "A Time Series Analysis of Representative Agent Models of Consumption andLeisure Choice Under Uncertainty," NBER Working Papers 1981, National Bureau of Economic Research, Inc.
  3. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  4. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 631-53, October.
  5. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  6. Nicholas M. Kiefer & Timothy J. Vogelsang & Helle Bunzel, 2000. "Simple Robust Testing of Regression Hypotheses," Econometrica, Econometric Society, vol. 68(3), pages 695-714, May.
  7. Kenneth D. West, 1995. "Another Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," NBER Technical Working Papers 0183, National Bureau of Economic Research, Inc.
  8. Wouter J. Den Haan & Andrew Levin, 1996. "Inferences from Parametric and Non-Parametric Covariance Matrix Estimation Procedures," NBER Technical Working Papers 0195, National Bureau of Economic Research, Inc.
  9. Andrews, Donald W K & Monahan, J Christopher, 1992. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Econometrica, Econometric Society, vol. 60(4), pages 953-66, July.
  10. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
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Cited by:
  1. Kilian, L. & Bergean, I., 1999. "Data-Driven Nonparametric Spectral Density Estimators for Economic Time Series: A Monte Carlo Study," Papers 99-04, Michigan - Center for Research on Economic & Social Theory.
  2. Ozgen Sayginsoy, 2005. "Powerful and Serial Correlation Robust Tests of the Economic Convergence Hypothesis," Econometrics 0503014, EconWPA, revised 11 Mar 2005.
  3. A. Craig Burnside, 2007. "Empirical Asset Pricing and Statistical Power in the Presence of Weak Risk Factors," NBER Working Papers 13357, National Bureau of Economic Research, Inc.
  4. Karamé, Frédéric & Patureau, Lise & Sopraseuth, Thepthida, 2008. "Limited participation and exchange rate dynamics: Does theory meet the data?," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1041-1087, April.
  5. repec:ebl:ecbull:v:3:y:2005:i:10:p:1-13 is not listed on IDEAS
  6. Motohiro Yogo, 2006. "A Consumption-Based Explanation of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 61(2), pages 539-580, 04.
  7. Richard Heaney & Kerry Pattenden, 2005. "Change in unconditional foreign exchange rate volatility: an analysis of the GBP and USD price of the Euro from 2002 to 2003," Applied Economics Letters, Taylor & Francis Journals, vol. 12(15), pages 929-932.
  8. Min-Hsien Chiang & Chihwa Kao, 2005. "Spectral Density Bandwidth Choice and Prewhitening in the Generalized Method of Moments Estimators for the Asset Pricing Model," Economics Bulletin, AccessEcon, vol. 3(10), pages 1-13.
  9. Matheron, Julien & Maury, Tristan-Pierre, 2004. "Supply-side refinements and the New Keynesian Phillips Curve," Economics Letters, Elsevier, vol. 82(3), pages 391-396, March.

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