HIGHER-ORDER ACCURATE, POSITIVE SEMIDEFINITE ESTIMATION OF LARGE-SAMPLE COVARIANCE AND SPECTRAL DENSITY MATRICES

Dimitris N. Politis

112 citations0/0 files storedEconometric Theory

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Financial Risk and Volatility Modeling Statistical Methods and Inference Random Matrices and Applications

Abstract

A new class of large-sample covariance and spectral density matrix estimators is proposed based on the notion of flat-top kernels. The new estimators are shown to be higher-order accurate when higher-order accuracy is possible. A discussion on kernel choice is presented as well as a supporting finite-sample simulation. The problem of spectral estimation under a potential lack of finite fourth moments is also addressed. The higher-order accuracy of flat-top kernel estimators typically comes at the sacrifice of the positive semidefinite property. Nevertheless, we show how a flat-top estimator can be modified to become positive semidefinite (even strictly positive definite) while maintaining its higher-order accuracy. In addition, an easy (and consistent) procedure for optimal bandwidth choice is given; this procedure estimates the optimal bandwidth associated with each individual element of the target matrix, automatically sensing (and adapting to) the underlying correlation structure.

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References

1997Modelling Extremal Events 1991Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation 1994Automatic Lag Selection in Covariance Matrix Estimation 1992An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator 2003Inference in Arch and Garch Models with Heavy-Tailed Errors

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