Prewhitening Bias in HAC Estimation
HAC estimation commonly involves the use of prewhitening filters based on simple autoregressive models. In such applications, small sample bias in the estimation of autoregressive coefficients is transmitted to the recoloring filter, leading to HAC variance estimates that can be badly biased. The present paper provides an analysis of these issues using asymptotic expansions and simulations. The approach we recommend involves the use of recursive demeaning procedures that mitigate the effects of small sample autoregressive bias. Moreover, a commonly-used restriction rule on the prewhitening estimates (that first order autoregressive coefficient estimates, or largest eigenvalues, greater than 0.97 be replaced by 0.97) adversely interferes with the power of unit root and KPSS tests. We provide a new boundary condition rule that improves the size and power properties of these tests. Some illustrations are given of the effects of these adjustments on the size and power of KPSS testing. Using prewhitened HAC estimates and the new boundary condition rule, the KPSS test is consistent, in contrast to KPSS testing that uses conventional prewhitened HAC estimates (Lee, 1996).
When requesting a correction, please mention this item's handle: RePEc:ysm:somwrk:ysm426. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.