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Testing for Causality in Variance using Multivariate GARCH Models

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  • Hafner, Christian M.
  • Herwartz, Helmut

Abstract

Tests of causality in variance in multiple time series have been proposed recently, based on residuals of estimated univariate models. Although such tests are applied frequently little is known about their power properties. In this paper we show that a convenient alternative to residual based testing is to specify a multivariate volatility model, such as multivariate GARCH (or BEKK), and construct a Wald test on noncausality in variance. We compare both approaches to testing causality in variance in terms of asymptotic and finite sample properties. The Wald test is shown to have superior power properties under a sequence of local alternatives. Furthermore, we show by simulation that the Wald test is quite robust to misspecification of the order of the BEKK model, but that empirical power decreases substantially when asymmetries in volatility are ignored. --

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Bibliographic Info

Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2004,03.

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Date of creation: 2004
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Handle: RePEc:zbw:cauewp:1690

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Keywords: causality; multivariate volatility; local power;

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References

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  13. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
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  15. Cheung, Yin-Wong & Ng, Lilian K., 1996. "A causality-in-variance test and its application to financial market prices," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 33-48.
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Citations

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Cited by:
  1. Grydaki, Maria & Bezemer, Dirk, 2013. "The role of credit in the Great Moderation: A multivariate GARCH approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4615-4626.
  2. Bezemer, Dirk J & Grydaki, Maria, 2012. "Mortgage Lending and the Great moderation: a multivariate GARCH Approach," MPRA Paper 36356, University Library of Munich, Germany.
  3. Tomasz Wozniak, 2012. "Testing Causality Between Two Vectors in Multivariate GARCH Models," Department of Economics - Working Papers Series 1139, The University of Melbourne.
  4. Pablo Mendieta Ossio & Sergio Cerezo Aguirre & Javier Cossío Medinacelli, 2009. "¿La inflación está de vuelta en Sudamérica?. Choques exógenos, expectativas y credibilidad de la política monetaria," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 11(1), pages 111-146, December.
  5. Mario Reyna Cerecero & Diana Salazar Cavazos & Héctor Salgado Banda, 2009. "La curva de rendimiento y su relación con la actividad económica: una aplicación para México," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(3), pages 297-357, octubre-d.
  6. Guillermo Benavides & Carlos Capistrán, 2009. "A Note on the Volatilities of the Interest Rate and the Exchange Rate Under Different Monetary Policy Instruments: Mexico 1998-2008," Working Papers 2009-10, Banco de México.
  7. Tomasz Wozniak, 2012. "Granger-causal analysis of VARMA-GARCH models," Economics Working Papers ECO2012/19, European University Institute.
  8. Gebka, Bartosz & Serwa, Dobromil, 2007. "Intra- and inter-regional spillovers between emerging capital markets around the world," Research in International Business and Finance, Elsevier, vol. 21(2), pages 203-221, June.
  9. Guillermo Benavides & Carlos Capistrán, 2009. "Una nota sobre las volatilidades de la tasa de interés y del tipo de cambio según diferentes instrumentos de política monetaria: México 1998-2008," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(3), pages 391-412, octubre-d.
  10. Javier Pereda, 2009. "Estimación de la curva de rendimiento para el Perú y su uso para el análisis monetario," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(3), pages 413-450, octubre-d.
  11. Matthieu Droumaguet & Tomasz Wozniak, 2012. "Bayesian Testing of Granger Causality in Markov-Switching VARs," Economics Working Papers ECO2012/06, European University Institute.
  12. Grydaki, Maria & Bezemer, Dirk J., 2012. "The Role of Credit in Great Moderation: a Multivariate GARCH Approach," MPRA Paper 39813, University Library of Munich, Germany.
  13. Hecq Alain & Laurent Sébastien & Palm Franz C., 2012. "On the Univariate Representation of BEKK Models with Common Factors," Research Memorandum 018, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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