Robust Covariance Matrix Estimation with Data-Dependent VAR Prewhitening Order

This paper analyzes the performance of heteroskedasticity-and-autocorrelation-consistent (HAC) covariance matrix estimators in which the residuals are prewhitened using a vector autoregressive (VAR) filter. We highlight the pitfalls of using an arbitrarily fixed lag order for the VAR filter, and we demonstrate the benefits of using a model selection criterion (either AIC or BIC) to determine its lag structure. Furthermore, once datadependent VAR prewhitening has been utilized, we find negligible or even counterproductive effects of applying standard kernel-based methods to the prewhitened residuals; that is, the performance of the prewhitened kernel estimator is virtually indistinguishable from that of the VARHAC estimator.