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Testing Instantaneous Causality in Presence of Nonconstant Unconditional Covariance

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  • Quentin Giai Gianetto
  • Hamdi Raïssi

Abstract

This article investigates the problem of testing instantaneous causality between vector autoregressive (VAR) variables with time-varying unconditional covariance. It is underlined that the standard test does not control the Type I errors, while the tests with White and heteroscedastic autocorrelation consistent (HAC) corrections can suffer from a severe loss of power when the covariance is not constant. Consequently, we propose a modified test based on a bootstrap procedure. We illustrate the relevance of the modified test through a simulation study. The tests considered in this article are also compared by investigating the instantaneous causality relations between U.S. macroeconomic variables.

Suggested Citation

  • Quentin Giai Gianetto & Hamdi Raïssi, 2015. "Testing Instantaneous Causality in Presence of Nonconstant Unconditional Covariance," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 33(1), pages 46-53, January.
    • Handle: RePEc:taf:jnlbes:v:33:y:2015:i:1:p:46-53
    DOI: 10.1080/07350015.2014.920614
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