The Size-Power Tradeoff in HAR Inference

Lazarus, Eben; Lewis, Daniel; Stock, James H.

doi:10.2139/ssrn.3436372

Cited by 7 publications

(18 citation statements)

References 35 publications

(59 reference statements)

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“…Define L and G to be elimination and selection matrices respectively. 1 Lewis (2019) shows that for ζ t = vech (η t η t ),…”

Section: Identification Via Time-varying Volatilitymentioning

confidence: 97%

“…Multiple dimensions of monetary policy present a prime case for weak identification if shock volatilities move together even if the individual volatility changes are pronounced. Alternatively, variance regimes could be estimated daily, but Lewis (2019) argues that such estimated regimes are endogenous with respect to the structural shocks, which introduces bias into estimates.…”

Section: Identification Via Time-varying Volatilitymentioning

confidence: 99%

“…I therefore identify (3) based on time-varying volatility (TVV-ID), following the results of Lewis (2019). This strategy identifies the model based on the autocovariance of η dt η dt , which, provided dt is a martingale difference sequence, exploits persistence in the timevarying volatility of dt for identification.…”

Section: Identification Via Time-varying Volatilitymentioning

confidence: 99%

“…I assume stationarity of σ t for clarity and coherence with empirical practice, unlike in the statements of Lewis (2019). The first assumption is a standard requirement for identification of models of the form (2).…”

Section: Identification Via Time-varying Volatilitymentioning

confidence: 99%

“…There are clearly asset price movements besides the change across the usual 30-minute event window (14:13 to 14:43) which may offer previously unexploited identifying variation. To identify the decomposition, I apply results from Lewis (2019), based on the simple assumption that the shock volatility varies, with some persistence, over the course of the day. The stark intraday volatility patterns evident in Figure 1 motivate this identification approach.…”

Section: Introductionmentioning

confidence: 99%

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Announcement-Specific Decompositions of Unconventional Monetary Policy Shocks and Their Macroeconomic Effects

Lewis

2019

SSRN Journal

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I propose to identify announcement-specific decompositions of asset price changes into monetary policy shocks based on intraday time-varying volatility. This approach is the first to accommodate changes in both the nature of shocks and the state of the economy across announcements. I compute daily historical decompositions with respect to three monetary policy shocks for the United States from 2007 to 2018. I derive expressions for the asymptotic variance of such historical decompositions and apply them to assess the statistical significance of notable announcements. Only a handful spark significant shocks, and I discuss the characteristics of those announcements in detail. For many announcements, asset purchase shocks lower corporate borrowing costs, but spreads increase in response to both asset purchases and forward guidance. Turning to the real economy, I find that the asset purchase shock has significant effects on consumer and professional expectations of inflation and GDP growth. I compute dynamic responses of inflation and GDP growth; asset purchases have significant expansionary effects, while fed funds shocks and forward guidance do not.

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“…Define L and G to be elimination and selection matrices respectively. 1 Lewis (2019) shows that for ζ t = vech (η t η t ),…”

Section: Identification Via Time-varying Volatilitymentioning

confidence: 97%

Section: Identification Via Time-varying Volatilitymentioning

confidence: 99%

Section: Identification Via Time-varying Volatilitymentioning

confidence: 99%

Section: Identification Via Time-varying Volatilitymentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Announcement-Specific Decompositions of Unconventional Monetary Policy Shocks and Their Macroeconomic Effects

Lewis

2019

SSRN Journal

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HAR Inference: Recommendations for Practice

Lazarus¹,

Lewis

Stock

et al. 2018

Journal of Business & Economic Statistics

173

115

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The classic papers by Newey and West (1987) and Andrews (1991) spurred a large body of work on how to improve heteroskedasticity-and autocorrelation-robust (HAR) inference in time series regression. This literature finds that using a larger-than-usual truncation parameter to estimate the long-run variance, combined with Kiefer-Vogelsang (2002, 2005 fixed-b critical values, can substantially reduce size distortions, at only a modest cost in (size-adjusted) power. Empirical practice, however, has not kept up. This paper therefore draws on the post-Newey West/Andrews literature to make concrete recommendations for HAR inference. We derive truncation parameter rules that choose a point on the size-power tradeoff to minimize a loss function. If Newey-West tests are used, we recommend the truncation parameter rule S = 1.3T 1/2 and (nonstandard) fixed-b critical values. For tests of a single restriction, we find advantages to using the equal-weighted cosine (EWC) test, where the long run variance is estimated by projections onto Type II cosines, using ν = 0.4T 2/3 cosine terms; for this test, fixed-b critical values are, conveniently, tν or F. We assess these rules using first an ARMA/GARCH Monte Carlo design, then a dynamic factor model design estimated using a 207 quarterly U.S. macroeconomic time series.

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Practical Methods for Modeling Weak VARMA Processes: Identification, Estimation and Specification With a Macroeconomic Application

Dufour

Pelletier

2021

Journal of Business & Economic Statistics

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The Size-Power Tradeoff in HAR Inference

Cited by 7 publications

References 35 publications

Announcement-Specific Decompositions of Unconventional Monetary Policy Shocks and Their Macroeconomic Effects

Announcement-Specific Decompositions of Unconventional Monetary Policy Shocks and Their Macroeconomic Effects

HAR Inference: Recommendations for Practice

Practical Methods for Modeling Weak VARMA Processes: Identification, Estimation and Specification With a Macroeconomic Application

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