re: re: st: Correction for overlapping return series

[Malcolm Wardlaw <malcolm@mail.utexas.edu>]

Thanks for this.  I read Hansen-Hodrick, but couldn't figure out if the 
Newey-West correction was actually doing the same thing with an MA 
error.  Is there any practical difference in the two, aside from the 
fact that NW guarantees a positive definite covariance matrix?

-----------------------------------------------
Hansen, L.P., Hodrick, R.J.. "Forward Exchange-Rates As Optimal 
Predictors of Future Spot Rates - An Econometric-Analysis." Journal of 
Political Economy 88: 829-853, 1980.

Essentially if you overlap by 12, you are creating a MA(11) in the 
errors. (The more common issue, three-month T-bill rates observed 
monthly, gives rise to MA(2)). So applying a HAC estimator (e.g. 
Newey-West) with lag length = 11 should do it. Yes, this models the 
errors as AR(11) rather than MA(11), but it works. You can do this with 
-newey-.
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