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Spurious Granger causality between a broken-trend stationary process and a stochastic trend process

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  • Zhang, Lingxiang
  • Zhang, Xiaotong

Abstract

This paper examines spurious Granger causality between a trend stationary process with structural breaks and a stochastic trend process. Monte Carlo simulations show that whether or not there are deterministic variables in the testing models, the sample size and the parameter values of the data generation process can affect the empirical frequencies of spurious Granger causality relations in different degrees. The analysis also points out that an alternative rank-based causality test method can avoid the risk of spurious causality to some extent by adopting an intercept and deterministic trend term in the testing regressions.

Suggested Citation

  • Zhang, Lingxiang & Zhang, Xiaotong, 2011. "Spurious Granger causality between a broken-trend stationary process and a stochastic trend process," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 81(8), pages 1673-1681.
  • Handle: RePEc:eee:matcom:v:81:y:2011:i:8:p:1673-1681 DOI: 10.1016/j.matcom.2011.01.008
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    References listed on IDEAS

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    1. Cook, Steven, 2008. "Further analysis of spurious causality," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(3), pages 647-651.
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    3. Diks Cees & Panchenko Valentyn, 2005. "A Note on the Hiemstra-Jones Test for Granger Non-causality," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(2), pages 1-9, June.
    4. Bruce E. Hansen, 2001. "The New Econometrics of Structural Change: Dating Breaks in U.S. Labour Productivity," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 117-128, Fall.
    5. Perron, Pierre & Zhu, Xiaokang, 2005. "Structural breaks with deterministic and stochastic trends," Journal of Econometrics, Elsevier, vol. 129(1-2), pages 65-119.
    6. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    7. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(03), pages 315-352, June.
    8. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    9. Hiemstra, Craig & Jones, Jonathan D, 1994. " Testing for Linear and Nonlinear Granger Causality in the Stock Price-Volume Relation," Journal of Finance, American Finance Association, vol. 49(5), pages 1639-1664, December.
    10. He, Zonglu & Maekawa, Koichi, 2001. "On spurious Granger causality," Economics Letters, Elsevier, vol. 73(3), pages 307-313, December.
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