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# Newey-West Standard Errors

Discussion in 'Economics' started by annaland, Aug 26, 2007.

1. ### annaland

Hi,

Iâm looking for the appropriate criterion to determine lag length for the Newey-West standard errors. Can anyone recommend a source?

Anna

I'm using Greene's Econometrics text but am quite dissatisfied with his notation, which is why I'm confused about lag determination and not sure if AIC/SIC applies to Newey-West.

Help!

3. ### annaland

Thanks! Unfortunately, I'm not using Panel data (I'm neither testing nor adjusting for fixed or random effects); I'm using GMM on Time Series...

I think itâs either the number of observations to the 1/4th power or it's 1/4 * (number of observations raised to the 1/3rd power), but definitely not AIC/SIC as I previously stated

... not quite sure...

4. ### james_bond_3rd

Now I'm lost by what you said. What is the 1/4 power? Never heard of it.

For a moment I was puzzled by your AIC/SIC comment but realized that you meant Akaike and Bayesian Information Criteria (AIC/BIC). Why don't you think that they would work? Did you try DIC (Deviance Information Criterion) which is easier to calculate?

5. ### NoWorries

Newey and West discuss some alternatives in:

Newey & West (1994). Automatic Lag Selection in Covariance Matrix Estimation. Review of Economic Studies, v61, n4 (October 1994): 631-53.

6. ### annaland

The 1/4th power comes from Greene's Econometric Analysis (5th Edition) book, where he talks about Newey-West and I'm pretty sure he's referring to lag length. But I have a hard time staying with his notation and therefore get confused with the derivations. I donât have the time (or desire) to go through the chapter and re-derive his estimators.

The only reason I suspect AIC/BIC wonât work is because Greene doesnât mention it and therefore, I think there may be a more robust criterion. Iâm not too familiar with DIC, but I can look it into it. Thanks.

7. ### sjfan

I hate to be a jerk and give you citations, but it's been a very long time since I looked over Newey-West and I don't want to give you the wrong information. These two, I think, are the original papers (which means, of course, they will completely suck - but at least you can scan it quickly for 1/4 - or just read the abstract like everyone else):

Newey WK & West KD (1987), A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix. Econometrica, 55, 703â708.

8. ### annaland

Thanks for the replies. The number of lags is dependent on the process (moving average or autoregressive) and the order of autocorrelation that is significant. Generally, T^1/4 is the rule of thumb and experimentation is a good way to decide at which level lags can be ignored - where T is the # of observations. Newey and West extend Whiteâs (1980) approach and provide great detail, which I am not interested in. For my purposes, I will be using the rule of thumb. Thanks again for the replies and interest.

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