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Robust Covariance Matrix Estimation with Data-Dependent VAR Prewhitening Order

38 Pages Posted: 23 Aug 2000 Last revised: 14 Sep 2010

Wouter J. den Haan

University of Amsterdam; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Andrew T. Levin

affiliation not provided to SSRN

Date Written: June 2000

Abstract

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.

Suggested Citation

den Haan, Wouter J. and Levin, Andrew T., Robust Covariance Matrix Estimation with Data-Dependent VAR Prewhitening Order (June 2000). NBER Working Paper No. t0255. Available at SSRN: https://ssrn.com/abstract=235687

Wouter J. Den Haan (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www1.feb.uva.nl/toe/content/people/content/denhaan/pers.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Andrew Levin

affiliation not provided to SSRN

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