Robust Covariance Matrix Estimation with Data-Dependent VAR Prewhitening Order
Wouter J. den Haan
University of Amsterdam; Centre for Economic Policy Research (CEPR); Tinbergen Institute
Andrew T. Levin
affiliation not provided to SSRN
NBER Working Paper No. t0255
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.
Number of Pages in PDF File: 38
Date posted: August 23, 2000
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