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Some Finite Sample Results On Testing For Granger Noncausality

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Author Info
Judith A. Clarke () (Department of Economics, University of Victoria)
Sadaf Mirza
Abstract

We compare testing strategies for Granger noncausality in vector autoregressions (VARs)that may or may not have unit roots and cointegration. Sequential testing methods are examined; these test for cointegration and use either a differenced VAR or a vector error correction model(VECM), in which to undertake the main noncausality test. Basically, these strategies attempt to verify the validity of appropriate standard limit theory. We contrast such methods with an augmented lag approach that ensures the limiting Chi Square null distribution irrespective of the data’s nonstationarity characteristics. Our simulations involve bivariate and trivariate VARs in which we allow for the lag order to be selected by general to specific testing as well as by model selection criteria. We find that the current practice of pretesting for cointegration can result in severe over-rejections of the noncausal null while overfitting results in better control of the Type I error probability with often little loss in power.

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Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 0305.

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Length: 35 pages
Date of creation: 30 May 2003
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Handle: RePEc:vic:vicewp:0305

Note: ISSN 1485-6441
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Related research
Keywords: cointegration; error correction model; lag length selection; sequential testing; testing for Granger noncausality; Monte Carlo simulation;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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References listed on IDEAS
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  15. Hoffman, Dennis L & Rasche, Robert H, 1996. "Assessing Forecast Performance in a Cointegrated System," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 495-517, Sept.-Oct. [Downloadable!] (restricted)
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  21. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
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