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Resurrecting weighted least squares


Romano, Joseph P; Wolf, Michael (2016). Resurrecting weighted least squares. Working paper series / Department of Economics 172, University of Zurich.

Abstract

This paper shows how asymptotically valid inference in regression models based on the weighted least squares (WLS) estimator can be obtained even when the model for reweighting the data is misspecified. Like the ordinary least squares estimator, the WLS estimator can be accompanied by heterokedasticty-consistent (HC) standard errors without knowledge of the functional form of conditional heteroskedasticity. First, we provide rigorous proofs under reasonable assumptions; second, we provide numerical support in favor of this approach. Indeed, a Monte Carly study demonstrates attractive finite-sample properties compared to the status quo, both in terms of estimation and making inference.

Abstract

This paper shows how asymptotically valid inference in regression models based on the weighted least squares (WLS) estimator can be obtained even when the model for reweighting the data is misspecified. Like the ordinary least squares estimator, the WLS estimator can be accompanied by heterokedasticty-consistent (HC) standard errors without knowledge of the functional form of conditional heteroskedasticity. First, we provide rigorous proofs under reasonable assumptions; second, we provide numerical support in favor of this approach. Indeed, a Monte Carly study demonstrates attractive finite-sample properties compared to the status quo, both in terms of estimation and making inference.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:C12, C13, C21
Uncontrolled Keywords:Conditional heteroskedasticity, HC standard errors, weighted least squares
Language:English
Date:October 2016
Deposited On:03 Sep 2014 14:53
Last Modified:15 Aug 2017 17:16
Series Name:Working paper series / Department of Economics
Number of Pages:48
ISSN:1664-7041
Additional Information:Revised version
Official URL:http://www.econ.uzh.ch/static/wp/econwp172.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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