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Resurrecting weighted least squares

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  • Romano, Joseph P.
  • Wolf, Michael

Abstract

This paper shows how asymptotically valid inference in regression models based on the weighted least squares (WLS) estimator can be obtained even when the model for reweighting the data is misspecified. Like the ordinary least squares estimator, the WLS estimator can be accompanied by heteroskedasticity-consistent (HC) standard errors without knowledge of the functional form of conditional heteroskedasticity. First, we provide rigorous proofs under reasonable assumptions; second, we provide numerical support in favor of this approach. Indeed, a Monte Carlo study demonstrates attractive finite-sample properties compared to the status quo, in terms of both estimation and inference.

Suggested Citation

  • Romano, Joseph P. & Wolf, Michael, 2017. "Resurrecting weighted least squares," Journal of Econometrics, Elsevier, vol. 197(1), pages 1-19.
  • Handle: RePEc:eee:econom:v:197:y:2017:i:1:p:1-19
    DOI: 10.1016/j.jeconom.2016.10.003
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    More about this item

    Keywords

    Conditional heteroskedasticity; HC standard errors; Weighted least squares;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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