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Testing for Granger causality in a system of more than two variables

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Abstract

This paper provides useful guidelines to practitioners who investigate Granger causality within a system of more than two variables by means of the two-step procedure proposed by Cheung and Ng (Journal of Econometrics, 1996) and modified by Hong (Journal of Econometrics, 2001). First, a theoretical example highlights cases that can mislead the researcher into reporting false causal relations between the variables under scrutiny. Then, the size of the problem is revealed by means of Monte Carlo simulations. Finally, an empirical application that investigates causality-in-mean among six major European stock markets, illustrates the proper procedure to follow for correct inference.

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Bibliographic Info

Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2012_02.

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Date of creation: Jan 2012
Date of revision: Jan 2012
Handle: RePEc:mcd:mcddps:2012_02

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Web page: http://www.uom.gr/index.php?tmima=3

Related research

Keywords: Causality-in-mean; causality-in-variance; misspecification; simulation.;

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  1. Speight, Alan E. H. & McMillan, David G., 2001. "Volatility spillovers in East European black-market exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 20(3), pages 367-378, June.
  2. Inagaki, Kazuyuki, 2007. "Testing for volatility spillover between the British pound and the euro," Research in International Business and Finance, Elsevier, Elsevier, vol. 21(2), pages 161-174, June.
  3. Bhar, Ramaprasad & Hamori, Shigeyuki, 2005. "Causality in variance and the type of traders in crude oil futures," Energy Economics, Elsevier, Elsevier, vol. 27(3), pages 527-539, May.
  4. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
  5. Hong, Yongmiao, 2001. "A test for volatility spillover with application to exchange rates," Journal of Econometrics, Elsevier, Elsevier, vol. 103(1-2), pages 183-224, July.
  6. Cheung, Yin-Wong & Ng, Lilian K., 1996. "A causality-in-variance test and its application to financial market prices," Journal of Econometrics, Elsevier, Elsevier, vol. 72(1-2), pages 33-48.
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