Robust trend inference with series variance estimator and testing-optimal smoothing parameter

Yixiao Sun

Journal of Econometrics, 2011, vol. 164, issue 2, 345-366

Abstract: The paper develops a novel testing procedure for hypotheses on deterministic trends in a multivariate trend stationary model. The trends are estimated by the OLS estimator and the long run variance (LRV) matrix is estimated by a series type estimator with carefully selected basis functions. Regardless of whether the number of basis functions K is fixed or grows with the sample size, the Wald statistic converges to a standard distribution. It is shown that critical values from the fixed-K asymptotics are second-order correct under the large-K asymptotics. A new practical approach is proposed to select K that addresses the central concern of hypothesis testing: the selected smoothing parameter is testing-optimal in that it minimizes the type II error while controlling for the type I error. Simulations indicate that the new test is as accurate in size as the nonstandard test of Vogelsang and Franses (2005) and as powerful as the corresponding Wald test based on the large-K asymptotics. The new test therefore combines the advantages of the nonstandard test and the standard Wald test while avoiding their main disadvantages (power loss and size distortion, respectively).

Keywords: Asymptotic; expansion; F-distribution; Hotelling's; T2; distribution; Long; run; variance; Robust; standard; error; Series; method; Testing-optimal; smoothing; parameter; choice; Trend; inference; Type; I; and; type; II; errors (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:164:y:2011:i:2:p:345-366

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