Inference Optimal Long Run Variance Estimation with Lugsail Kernels
For datasets with unknown but stationary serial dependence, a robust long run variance estimator is essential to handle diverse scenarios. Spectral variance estimators are commonly used but tend to exhibit significant negative bias in the presence of positive correlation. To overcome this, zero lugsail estimators have been introduced, offering zero asymptotic bias regardless of the correlation structure. However, there are currently no guidelines for selecting the optimal bandwidth for lugsail estimators, a critical component in the estimation process. We propose an inference optimal bandwidth rule for lugsail estimators, based on nonstandard fixed-smoothing limiting distributions developed in our study. This approach significantly improves bias correction, accounts for variability, and provides an estimator optimized for robust inference. Our theoretical findings are supported by a simulation study.