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Testing for causality in variance in the presence of breaks

  • D van Dijk
  • D R Osborn
  • M Sensier

We examine the size properties of tests for causality in variance in the presence of structural breaks in volatility. Extensive Monte Carlo simulations demonstrate that these tests suffer from severe size distortions when such breaks are not taken into account. Pre-testing the series for structural changes in volatility is shown to largely remedy the problem.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr45.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 45.

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Length: 11 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:man:cgbcrp:45
Contact details of provider: Postal: Manchester M13 9PL
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/

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  1. Susmel, Raul & Engle, Robert F., 1994. "Hourly volatility spillovers between international equity markets," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 3-25, February.
  2. Bruce E. Hansen, 1995. "Approximate Asymptotic P-Values for Structural Change Tests," Boston College Working Papers in Economics 297., Boston College Department of Economics.
  3. Mervyn A. King & Sushil Wadhwani, 1989. "Transmission of Volatility Between Stock Markets," NBER Working Papers 2910, National Bureau of Economic Research, Inc.
  4. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  5. M Sensier & D van Dijk, 2003. "Testing for Volatility Changes in US Macroeconomic Time Series," Centre for Growth and Business Cycle Research Discussion Paper Series 36, Economics, The Univeristy of Manchester.
  6. Elena Andreou & Eric Ghysels, 2001. "Detecting Mutiple Breaks in Financial Market Volatility Dynamics," CIRANO Working Papers 2001s-65, CIRANO.
  7. Margaret McConnell & Gabriel Perez Quiros, 2000. "Output fluctuations in the United States: what has changed since the early 1980s?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  8. Lin, Wen-Ling & Engle, Robert F & Ito, Takatoshi, 1994. "Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 507-38.
  9. Billio, Monica & Pelizzon, Loriana, 2003. "Volatility and shocks spillover before and after EMU in European stock markets," Journal of Multinational Financial Management, Elsevier, vol. 13(4-5), pages 323-340, December.
  10. 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.
  11. Pantelidis, Theologos & Pittis, Nikitas, 2004. "Testing for Granger causality in variance in the presence of causality in mean," Economics Letters, Elsevier, vol. 85(2), pages 201-207, November.
  12. Oskar Morgenstern, 1959. "International Financial Transactions and Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number morg59-1, September.
  13. Hong, Yongmiao, 2001. "A test for volatility spillover with application to exchange rates," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 183-224, July.
  14. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
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