Lag order selection for long-run variance estimation in econometrics

Marco Morales

Econometric Reviews, 2024, vol. 43, issue 10, 774-795

Abstract: Estimating the long-run variance (LRV) is crucial for several econometric issues. Constructing reliable heteroskedasticity autocorrelation consistent (HAC) variance-covariance matrices and implementing efficient generalized method of moments (GMM) estimation procedures require a consistent LRV estimate. A good VARHAC estimator (HAC matrix with the spectral density at frequency zero constructed using a VAR spectral estimation) requires accurately estimating the sum of autoregressive (AR) coefficients; however, a criterion that minimizes the innovation variance does not necessarily yield the best spectral estimate. This article implements an optimal VARHAC estimator using an alternative information criterion, considering the bias in the sum of the parameters for the AR estimator of the spectral density at frequency zero.

Date: 2024
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DOI: 10.1080/07474938.2024.2364488

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