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Yixiao Sun (), Peter Phillips () and Sainan Jin

Econometric Theory, 2011, vol. 27, issue 6, 1320-1368

Abstract: Using the power kernels of Phillips, Sun, and Jin (2006, 2007), we examine the large sample asymptotic properties of the t-test for different choices of power parameter (Ï ). We show that the nonstandard fixed-Ï limit distributions of the t-statistic provide more accurate approximations to the finite sample distributions than the conventional large-Ï limit distribution. We prove that the second-order corrected critical value based on an asymptotic expansion of the nonstandard limit distribution is also second-order correct under the large-Ï asymptotics. As a further contribution, we propose a new practical procedure for selecting the test-optimal power parameter that addresses the central concern of hypothesis testing: The selected power parameter is test-optimal in the sense that it minimizes the type II error while controlling for the type I error. A plug-in procedure for implementing the test-optimal power parameter is suggested. Simulations indicate that the new test is as accurate in size as the nonstandard test of Kiefer and Vogelsang (2002a, 2002b), and yet it does not incur the power loss that often hurts the performance of the latter test. The results complement recent work by Sun, Phillips, and Jin (2008) on conventional and bT HAC testing.

Date: 2011
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Working Paper: Power Maximization and Size Control in Heteroskedasticity and Autocorrelation Robust Tests with Exponentiated Kernels (2010) Downloads
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