Finite Sample Properties of Tests Based on Prewhitened Nonparametric Covariance Estimators

Preinerstorfer, David (2014): Finite Sample Properties of Tests Based on Prewhitened Nonparametric Covariance Estimators.

Abstract

We analytically investigate size and power properties of a popular family of procedures for testing linear restrictions on the coefficient vector in a linear regression model with temporally dependent errors. The tests considered are autocorrelation-corrected F-type tests based on prewhitened nonparametric covariance estimators that possibly incorporate a data-dependent bandwidth parameter, e.g., estimators as considered in Andrews and Monahan (1992), Newey and West (1994), or Rho and Shao (2013). For design matrices that are generic in a measure theoretic sense we prove that these tests either suffer from extreme size distortions or from strong power deficiencies. Despite this negative result we demonstrate that a simple adjustment procedure based on artificial regressors can often resolve this problem.

• Item Type: MPRA Paper
• Language: English
• Keywords: Autocorrelation robustness, HAC test, fixed-b test, prewhitening, size distortion, power deficiency, artificial regressors.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models

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