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Optimal Time Interval Selection in Long-Run Correlation Estimation

Abstract : This paper presents an asymptotically optimal time interval selection criterion for the long-run correlation block estimator (Bartlett kernel estimator) based on the Newey–West and Andrews–Monahan approaches. An alignment criterion that enhances finite-sample performance is also proposed. The procedure offers an optimal alternative to the customary practice in finance and economics of heuristically or arbitrarily choosing time intervals or lags in correlation studies. A Monte Carlo experiment using parameters derived from Dow Jones returns data confirms that the procedure can be MSE-superior to alternatives such as aggregation over arbitrary time intervals, parametric VAR, and Newey–West covariance matrix estimation with automatic lag selection.
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Submitted on : Thursday, July 9, 2020 - 2:35:06 PM
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Pedro Albuquerque. Optimal Time Interval Selection in Long-Run Correlation Estimation. Journal of Quantitative Economics, The Indian Econometric Society, 2020, 18 (1), pp.53-79. ⟨10.1007/s40953-019-00175-x⟩. ⟨hal-02482675⟩

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