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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
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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

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