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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:
Wouter J. den Haan and Andrew T. Levin, "Robust Covariance Matrix Estimation with Data-Dependent VAR Prewhitening Order" (June 1, 2000). Department of Economics, UCSD. Paper 2000-11.
http://repositories.cdlib.org/ucsdecon/2000-11