Testing for the Sandwich-Form Covariance Matrix Applied to Quasi-Maximum Likelihood Estimation Using Economic and Energy Price Growth Rates

Lijuan Huo and Jin Seo Cho ()
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Lijuan Huo: Beijing Institute of Technology

No 2019rwp-152, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: This study aims to directly test for the sandwich-form asymptotic covariance matrix entailed by conditional heteroskedasticity and autocorrelation in the regression error. Given that none of the conditional heteroskedastic or autocorrelated regression errors yield the sandwich-form asymptotic covariance matrix for the least squares estimator, it is not necessary to estimate the asymptotic covariance matrix using the heteroskedasticity-consistent (HC) or heteroskedasticity and autocorrelation-consistent (HAC) covariance matrix estimator. Because of this fact, we first examine testing for the sandwich-form asymptotic covariance matrix before applying the HC or HAC covariance matrix estimator. For this goal, we apply the testing methodologies proposed by Cho and White (2015) and Cho and Phillips (2018) to fit the context of this study by extending the scope of their maximum test statistic to have greater power and further establishing a methodology to sequentially detect the influence of heteroskedastic and autocorrelated regression errors on the asymptotic covariance matrix. We affirm the theory on the test statistics of this study through a simulation and further apply our test statistics to economic and energy price growth rate data for illustrative purposes.

Keywords: Information matrix equality; sandwich-form covariance matrix; heteroskedasticity-consistent covariance matrix estimator; heteroskedasticity and autocorrelation-consistent covariance matrix estimator; economic growth rate; energy price growth rate. (search for similar items in EconPapers)
JEL-codes: C12 C22 G17 O47 Q47 (search for similar items in EconPapers)
Pages: 28pages
Date: 2019-11
New Economics Papers: this item is included in nep-ecm, nep-ene, nep-ets and nep-ore
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