Hostname: page-component-8448b6f56d-c4f8m Total loading time: 0 Render date: 2024-04-23T15:52:54.577Z Has data issue: false hasContentIssue false
  • English
  • Français

Consistent Covariance Matrix Estimation with Cross-Sectional Dependence and Heteroskedasticity in Financial Data

Published online by Cambridge University Press:  06 April 2009

Kenneth A. Froot
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper provides a simple method to account for heteroskedasticity and cross-sectional dependence in samples with large cross sections and relatively few time-series observations. The method is motivated by cross-sectional regression studies in finance and accounting. Simulation evidence suggests that these estimators are dependable in small samples and may be useful when generalized least squares is infeasible, unreliable, or computationally too burdensome. We also consider efficiency issues and show that, in principle, asymptotic efficiency can be improved using a technique due to Cragg (1983).

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 3 , September 1989 , pp. 333 - 355
Copyright
Copyright © School of Business Administration, University of Washington 1989

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Beaver, W. H.; Eger, C.; Ryan, S.; and Wolfson, M.. “Financial Reporting and the Structure of Bank Share Prices.” Working Paper, Stanford Univ. (07 1985).Google Scholar
Bernard, V. L. “Unanticipated Inflation and the Value of the Firm.” Journal of Financial Economics, 15 (03 1986a), 285–321.CrossRefGoogle Scholar
Bernard, V. L. “Cross-Sectional Dependence and Problems in Inference in Market-Based Accounting Research.” Working Paper, Univ. of Michigan (10 1986b).Google Scholar
Black, F.; Jensen, M. C.; and Scholes, M.. “The Capital Asset Pricing Model: Some Empirical Tests.” In Studies in the Theory of Capital Markets, Jensen, M. C., ed. New York; Praeger (1972), 79–121.Google Scholar
Brown, S., and Warner, J.. “Measuring Security Price Performance.” Journal of Financial Economics, 8 (09 1980), 205–258.CrossRefGoogle Scholar
Brown, S., and Warner, J.. “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics, 14 (03 1985), 3–32.CrossRefGoogle Scholar
Brown, S., and Weinstein, M.. “A New Approach to Testing Asset Pricing Models: The Bilinear Paradigm.” Journal of Finance, 38 (06 1983), 711–743.CrossRefGoogle Scholar
Chamberlain, G., and Rothschild, M.. “Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets.” Econometrica, 51 (09 1983), 1281–1304.CrossRefGoogle Scholar
Christie, A. “On Cross-Sectional Analysis in Accounting Research.” Working Paper, Univ. of Southern California (1985).Google Scholar
Collins, D., and Dent, W.. “A Comparison of Alternative Testing Methodologies Used in Capital Markets Research.” Journal of Accounting Research, 22 (Spring 1984), 48–84.CrossRefGoogle Scholar
Cragg, J. G. “More Efficient Estimation in the Presence of Heteroskedasticity of Unknown Form.” Econometrica, 51 (05 1983), 751–763.CrossRefGoogle Scholar
Cumby, R.; Huizinga, J.; and Obstfeld, M.. “Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations.” Journal of Econometrics, 21 (04 1983), 333–355.CrossRefGoogle Scholar
Eicker, F. “Limit Theorems for Regressions with Unequal and Dependent Errors.” In Proceedings of the Fifth Berkeley Symposium on Mathematical Statistics and Probability, LeCam, L. and Neyman, J., eds. Berkeley, CA: Univ. of California Press (1967), 59–82.Google Scholar
Gibbons, M. “Multivariate Tests of Financial Models: A New Approach.” Journal of Financial Economics, 10 (03 1982), 3–27.CrossRefGoogle Scholar
Hansen, L. P. “Large Sample Properties of Generalized Method of Moments Estimators.” Econometrica, 50 (07 1982), 1029–1054.CrossRefGoogle Scholar
Ingersol, J. “Some Results in the Theory of Arbitrage Pricing.” Journal of Finance, 39 (09 1984), 1021–1039.CrossRefGoogle Scholar
Jaffe, J. “Special Information and Insider Trading.” Journal of Business, 47 (07 1974), 410–428.CrossRefGoogle Scholar
Kinderman, A. J., and Ramage, J. G.. “Computer Generation of Normal Random Numbers.” Journal of the American Statistical Association, 71 (12 1976), 893–896.CrossRefGoogle Scholar
Malatesta, P. “Measuring Abnormal Performance: The Event Parameter Approach Using Joint Generalized Least Squares.” Journal of Financial and Quantitative Analysis, 21 (03 1986), 27–38.CrossRefGoogle Scholar
Malatesta, P., and Thompson, R.. “Partially Anticipated Events: A Model of Stock Price Reaction with an Application to Corporate Acquisitions.” Journal of Financial Economics, 14 (06 1985), 237–250.CrossRefGoogle Scholar
Press, S.Applied Multivariate Analysis. New York: Holt, Rinehart, and Winston (1972).Google Scholar
Rao, C. “Estimation of Heteroskedastic Variances in Linear Models.” Journal of the American Statistical Association, 65 (01 1970), 161–172.CrossRefGoogle Scholar
Rothenberg, T. “Approximate Normality of Generalized Least Squares Estimates.” Econometrica, 52 (07 1984), 811–825.CrossRefGoogle Scholar
Sefcik, S., and Thompson, R.. “An Approach to Statistical Inference in Cross-Sectional Regression with Security Abnormal Returns as Dependent Variable.” Working Paper No. 1017, Univ. of British Columbia (01 1985), and forthcoming, Journal of Accounting Research.Google Scholar
Shipper, K., and Thompson, R.. “The Impact of Merger-Related Regulations on the Shareholders of Acquiring Firms.” Journal of Accounting Research, 21 (Spring 1983), 184–221.CrossRefGoogle Scholar
Shipper, K., and Thompson, R.. “The Impact of Merger-Related Regulations Using Exact Distributions of Test Statistics.” Journal of Accounting Research, 23 (Spring 1985), 408–415.CrossRefGoogle Scholar
Thompson, R. “Conditioning the Return-Generating Process on Firm-Specific Events: A Discussion of Event Study Methodologies.” Journal of Financial and Quantitative Analysis, 20 (06 1985), 151–172.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (05 1980a), 817–838.CrossRefGoogle Scholar
White, H. “Nonlinear Regression on Cross-Section Data.” Econometrica, 48 (04 1980b), 721–746.CrossRefGoogle Scholar
White, H.Asymptotic Theory for Econometricians. New York: Academic Press (1984).Google Scholar