Valid Heteroskedasticity Robust Testing

Benedikt Pötscher and David Preinerstorfer

MPRA Paper from University Library of Munich, Germany

Abstract: Tests based on heteroskedasticity robust standard errors are an important technique in econometric practice. Choosing the right critical value, however, is not all that simple: Conventional critical values based on asymptotics often lead to severe size distortions; and so do existing adjustments including the bootstrap. To avoid these issues, we suggest to use smallest size-controlling critical values, the generic existence of which we prove in this article. Furthermore, sufficient and often also necessary conditions for their existence are given that are easy to check. Granted their existence, these critical values are the canonical choice: larger critical values result in unnecessary power loss, whereas smaller critical values lead to over-rejections under the null hypothesis, make spurious discoveries more likely, and thus are invalid. We suggest algorithms to numerically determine the proposed critical values and provide implementations in accompanying software. Finally, we numerically study the behavior of the proposed testing procedures, including their power properties.

Keywords: Heteroskedasticity; Robustness; Tests; Size of a test (search for similar items in EconPapers)
JEL-codes: C12 C14 C20 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-ecm
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https://mpra.ub.uni-muenchen.de/107420/1/MPRA_paper_107420.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/115483/1/MPRA_paper_115483.pdf revised version (application/pdf)

Related works:
Working Paper: Valid Heteroskedasticity Robust Testing (2023)
Working Paper: Valid Heteroskedasticity Robust Testing (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:107420

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