Linton, O. and Xiao, Z.

Efficient estimation of nonparametric regression in the presence of dynamic heteroskedasticity

Journal of Econometrics

(2019)

Abstract: We study the efficient estimation of nonparametric regression in the presence of heteroskedasticity. We focus our analysis on local polynomial estimation of nonparametric regressions with conditional heteroskedasticity in a time series setting. We introduce a weighted local polynomial regression smoother that takes account of the dynamic heteroskedasticity. We show that, although traditionally it is advised that one should not weight for heteroskedasticity in nonparametric regressions, in many popular nonparametric regression models our method has lower asymptotic variance than the usual unweighted procedures. We conduct a Monte Carlo investigation that confirms the efficiency gain over conventional nonparametric regression estimators in finite samples.

Keywords: Efficiency, Heteroskedasticity, Local polynomial estimation, Nonparametric regression

JEL Codes: C13, C14

Author links: Oliver Linton  

Publisher's Link: http://dx.doi.org/10.1016/j.jeconom.2019.01.016