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The performance of heteroskedasticity and autocorrelation robust tests: a Monte Carlo study with an application to the three-factor Fama-French asset-pricing model

Author

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  • Surajit Ray

    (Bear Stearns Asset Management, New York, USA)

  • N. E. Savin

    (Department of Economics, Tippie College of Business, University of Iowa, Iowa City, Iowa, USA)

Abstract

This paper illustrates the pitfalls of the conventional heteroskedasticity and autocorrelation robust (HAR) Wald test and the advantages of new HAR tests developed by Kiefer and Vogelsang in 2005 and by Phillips, Sun and Jin in 2003 and 2006. The illustrations use the 1993 Fama-French three-factor model. The null that the intercepts are zero is tested for 5-year, 10-year and longer sub-periods. The conventional HAR test with asymptotic P-values rejects the null for most 5-year and 10-year sub-periods. By contrast, the null is not rejected by the new HAR tests. This conflict is explained by showing that inferences based on the conventional HAR test are misleading for the sample sizes used in this application. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Surajit Ray & N. E. Savin, 2008. "The performance of heteroskedasticity and autocorrelation robust tests: a Monte Carlo study with an application to the three-factor Fama-French asset-pricing model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 91-109.
    • Handle: RePEc:jae:japmet:v:23:y:2008:i:1:p:91-109
    DOI: 10.1002/jae.972
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    Cited by:

    1. Beaulieu, Marie-Claude & Dufour, Jean-Marie & Khalaf, Lynda, 2010. "Asset-pricing anomalies and spanning: Multivariate and multifactor tests with heavy-tailed distributions," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 763-782, September.
    2. Sun, Yixiao & Phillips, Peter C.B. & Jin, Sainan, 2011. "Power Maximization And Size Control In Heteroskedasticity And Autocorrelation Robust Tests With Exponentiated Kernels," Econometric Theory, Cambridge University Press, vol. 27(6), pages 1320-1368, December.
    3. Ray, Surajit & Savin, N.E. & Tiwari, Ashish, 2009. "Testing the CAPM revisited," Journal of Empirical Finance, Elsevier, vol. 16(5), pages 721-733, December.
    4. Sun, Yixiao, 2014. "Let’s fix it: Fixed-b asymptotics versus small-b asymptotics in heteroskedasticity and autocorrelation robust inference," Journal of Econometrics, Elsevier, vol. 178(P3), pages 659-677.
    5. Xu, Ke-Li, 2016. "Multivariate trend function testing with mixed stationary and integrated disturbances," Journal of Multivariate Analysis, Elsevier, vol. 147(C), pages 38-57.
    6. Yang, Lixiong & Lee, Chingnun & Shie, Fu Shuen, 2014. "How close a relationship does a capital market have with other markets? A reexamination based on the equal variance test," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 198-226.

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