IDEAS home Printed from https://ideas.repec.org/a/eme/jespps/v39y2012i2p144-160.html
   My bibliography  Save this article

A bootstrap test for causality with endogenous lag length choice: theory and application in finance

Author

Listed:
  • Scott Hacker
  • Abdulnasser Hatemi-J

Abstract

Purpose - In all existing theoretical papers on causality it is assumed that the lag length is known a priori. However, in applied research the lag length has to be selected before testing for causality. The purpose of this paper is to suggest that in investigating the effectiveness of various Granger causality testing methodologies, including those using bootstrapping, the lag length choice should be endogenized, by which we mean the data-driven preselection of lag length should be taken into account. Design/methodology/approach - The size and power of a bootstrap test with endogenized lag-length choice are investigated by simulation methods. A statistical software component is produced to implement the test, which is available online. Findings - The simulation results show that this test performs well. An application of the test provides empirical support for the hypothesis that the UAE financial market is integrated with the US market. Social implications - The empirical results based on this test are expected to be more precise. Originality/value - This paper considers a bootstrap test for causality with endogenous lag order. This test has superior properties compared to existing causality tests in terms of size, with similar if not better power and it is robust to ARCH effects that usually characterize financial data. Practitioners interested in causal inference based on time series data might find the test valuable.

Suggested Citation

  • Scott Hacker & Abdulnasser Hatemi-J, 2012. "A bootstrap test for causality with endogenous lag length choice: theory and application in finance," Journal of Economic Studies, Emerald Group Publishing, vol. 39(2), pages 144-160, May.
  • Handle: RePEc:eme:jespps:v:39:y:2012:i:2:p:144-160
    as

    Download full text from publisher

    File URL: http://www.emeraldinsight.com/10.1108/01443581211222635?utm_campaign=RePEc&WT.mc_id=RePEc
    Download Restriction: Access to full text is restricted to subscribers

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    2. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    3. R. Scott Hacker & Abdulnasser Hatemi-J, 2005. "A test for multivariate ARCH effects," Applied Economics Letters, Taylor & Francis Journals, vol. 12(7), pages 411-417.
    4. R. Scott Hacker & Abdulnasser Hatemi-J, 2006. "Tests for causality between integrated variables using asymptotic and bootstrap distributions: theory and application," Applied Economics, Taylor & Francis Journals, vol. 38(13), pages 1489-1500.
    5. Hatemi-J, Abdulnasser, 2004. "Multivariate tests for autocorrelation in the stable and unstable VAR models," Economic Modelling, Elsevier, vol. 21(4), pages 661-683, July.
    6. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gülbahar ÜÇLER, 2016. "Testing the relationship between military spending and private investments: Evidence from Turkey," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 307-318, Autumn.
    2. repec:eee:riibaf:v:41:y:2017:i:c:p:547-555 is not listed on IDEAS
    3. Fousekis, Panos & Katrakilidis, Constantinos & Trachanas, Emmanouil, 2016. "Vertical price transmission in the US beef sector: Evidence from the nonlinear ARDL model," Economic Modelling, Elsevier, vol. 52(PB), pages 499-506.
    4. repec:jfr:rwe111:v:7:y:2016:i:1:p:80-94 is not listed on IDEAS
    5. repec:eee:finana:v:53:y:2017:i:c:p:94-111 is not listed on IDEAS
    6. Gülbahar ÜÇLER, 2016. "Testing the relationship between military spending and private investments: Evidence from Turkey," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 307-318, Autumn.
    7. Selim Yildirim & Bilge Kagan Özdemir & Burhan Dogan, 2013. "Financial Development and Economic Growth Nexus in Emerging European Economies: New Evidence from Asymmetric Causality," International Journal of Economics and Financial Issues, Econjournals, vol. 3(3), pages 710-722.

    More about this item

    Keywords

    Causality; VAR model; Stability; Endogenous lag; ARCH; Leverages; Bootstrap; Economic stability; Finance;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:jespps:v:39:y:2012:i:2:p:144-160. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman). General contact details of provider: http://www.emeraldinsight.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.