The performance of heteroskedasticity and autocorrelation robust tests: a Monte Carlo study with an application to the three-factor Fama-French asset-pricing model

Surajit Ray and N. E. Savin
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Surajit Ray: Bear Stearns Asset Management, New York, USA, Postal: Bear Stearns Asset Management, New York, USA
N. E. Savin: Department of Economics, Tippie College of Business, University of Iowa, Iowa City, Iowa, USA, Postal: Department of Economics, Tippie College of Business, University of Iowa, Iowa City, Iowa, USA

Journal of Applied Econometrics, 2008, vol. 23, issue 1, pages 91-109

Abstract: This paper illustrates the pitfalls of the conventional heteroskedasticity and autocorrelation robust (HAR) Wald test and the advantages of new HAR tests developed by Kiefer and Vogelsang in 2005 and by Phillips, Sun and Jin in 2003 and 2006. The illustrations use the 1993 Fama-French three-factor model. The null that the intercepts are zero is tested for 5-year, 10-year and longer sub-periods. The conventional HAR test with asymptotic P-values rejects the null for most 5-year and 10-year sub-periods. By contrast, the null is not rejected by the new HAR tests. This conflict is explained by showing that inferences based on the conventional HAR test are misleading for the sample sizes used in this application. Copyright © 2007 John Wiley & Sons, Ltd.

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