On Long-Run Covariance Matrix Estimation with the Truncated Flat Kernel

Shinichi Sakata
Tue, Jun 3, 2008
Simon Fraser University, Burnaby, Canada
PIMS Vancouver Econometrics Workshop

Despite its large sample efficiency, the truncated flat (TF) kernel estimator of long-run covariance matrices is seldom used, because it lacks the guaranteed positive semidefiniteness and sometimes performs poorly in small samples, compared to other familiar kernel estimators. This paper proposes simple modifications to the TF estimator to enforce the positive definiteness without sacrificing the large sample efficiency and make the estimator more reliable in small samples through better utilization of the bias-variance tradeoff. We study the large sample properties of the modified TF estimators and verify their improved small-sample performances by Monte Carlo simulations.