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Optimal Bandwidth Selection in Heteroskedasticity-Autocorrelation Robust Testing

  • Yixiao Sun
  • Peter C. B. Phillips
  • Sainan Jin

This paper considers studentized tests in time series regressions with nonparametrically autocorrelated errors. The studentization is based on robust standard errors with truncation lag M=bT for some constant b is an element of (0, 1] and sample size T. It is shown that the nonstandard fixed-b limit distributions of such nonparametrically studentized tests provide more accurate approximations to the finite sample distributions than the standard small-b limit distribution. We further show that, for typical economic time series, the optimal bandwidth that minimizes a weighted average of type I and type II errors is larger by an order of magnitude than the bandwidth that minimizes the asymptotic mean squared error of the corresponding long-run variance estimator. A plug-in procedure for implementing this optimal bandwidth is suggested and simulations (not reported here) confirm that the new plug-in procedure works well in finite samples. Copyright The Econometric Society 2008.

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File URL: http://hdl.handle.net/10.1111/j.1468-0262.2008.00822.x
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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 76 (2008)
Issue (Month): 1 (01)
Pages: 175-194

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Handle: RePEc:ecm:emetrp:v:76:y:2008:i:1:p:175-194
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  1. Phillips, Peter C.B. & Magdalinos, Tassos, 2007. "Limit theory for moderate deviations from a unit root," Journal of Econometrics, Elsevier, vol. 136(1), pages 115-130, January.
  2. Peter C.B. Phillips & Victor Solo, 1989. "Asymptotics for Linear Processes," Cowles Foundation Discussion Papers 932, Cowles Foundation for Research in Economics, Yale University.
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