Peter C.B. Phillips () (Yale University, Cowles Foundation) Sainan Jin () (Yale University, Faculty of Arts & Sciences, Department of Economics (Box 8268)) Yixiao Sun () (University of California, San Diego, Division of Social Sciences, Department of Economics)
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A new family of kernels is suggested for use in heteroskedasticity and autocorrelation consistent (HAC) and long run variance (LRV) estimation and robust regression testing. The kernels are constructed by taking powers of the Bartlett kernel and are intended to be used with no truncation (or bandwidth) parameter. As the power parameter (rho) increases, the kernels become very sharp at the origin and increasingly downweight values away from the origin, thereby achieving effects similar to a bandwidth parameter. Sharp origin kernels can be used in regression testing in much the same way as conventional kernels with no truncation, as suggested in the work of Kiefer and Vogelsang (2002a, 2002b). A unified representation of HAC limit theory for untruncated kernels is provided using a new proof based on Mercer's theorem that allows for kernels which may or may not be differentiable at the origin. This new representation helps to explain earlier findings like the dominance of the Bartlett kernel over quadratic kernels in test power and yields new findings about the asymptotic properties of tests with sharp origin kernels. Analysis and simulations indicate that sharp origin kernels lead to tests with improved size properties relative to conventional tests and better power properties than other tests using Bartlett and other conventional kernels without truncation. If rho is passed to infinity with the sample size (T), the new kernels provide consistent HAC and LRV estimates as well as continued robust regression testing. Optimal choice of rho based on minimizing the asymptotic mean squared error of estimation is considered, leading to a rate of convergence of the kernel estimate of T1/3, analogous to that of a conventional truncated Bartlett kernel estimate with an optimal choice of bandwidth. A data-based version of the consistent sharp origin kernel is obtained which is easily implementable in practical work. Within this new framework, untruncated kernel estimation can be regarded as a form of conventional kernel estimation in which the usual bandwidth parameter is replaced by a power parameter that serves to control the degree of downweighting. Simulations show that in regression testing with the sharp origin kernel, the power properties are better than those with simple untruncated kernels (where rho = 1) and at least as good as those with truncated kernels. Size is generally more accurate with sharp origin kernels than truncated kernels. In practice a simple fixed choice of the exponent parameter around rho = 16 for the sharp origin kernel produces favorable results for both size and power in regression testing with sample sizes that are typical in econometric applications.
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