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Some Pretesting Issues on Testing for Granger Noncausality

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  • Judith A. Giles

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  • 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, the pretesting strategies attempt to verify the validity of appropriate standard limit theory. These methods are contrasted 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 suffers less size distortion with often little loss in power.

Suggested Citation

  • Judith A. Giles & Sadaf Mirza, 1999. "Some Pretesting Issues on Testing for Granger Noncausality," Econometrics Working Papers 9914, Department of Economics, University of Victoria.
  • Handle: RePEc:vic:vicewp:9914
    Note: ISSN 1485-6441
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    File URL: http://www.uvic.ca/socialsciences/economics/assets/docs/econometrics/ewp9914.pdf
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    Cited by:

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    2. Konya, Laszlo, 2004. "Unit-Root, Cointegration and Granger Causality Test Results for Export and Growth in OECD Countries," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(2), pages 67-94.
    3. Gary Gang Tian, 2007. "Are Chinese Stock Markets Increasing Integration With Other Markets In The Greater China Region And Other Major Markets?," Australian Economic Papers, Wiley Blackwell, vol. 46(3), pages 240-253, September.
    4. Badarudin, Z.E. & Ariff, M. & Khalid, A.M., 2013. "Post-Keynesian money endogeneity evidence in G-7 economies," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 146-162.
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    6. Tronzano, Marco, 2010. "Reassessing the Dynamic Links between Trade and Growth: New Empirical Evidence from India - Un riesame delle relazioni tra commercio estero e crescita economica:nuova evidenza empirica per l’India," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 63(2), pages 217-244.
    7. Md. Shahadath Hossain & A.B.M. Munibur Rahman & Md. Salah Uddin Rajib, 2013. "Dynamics of Mutual Funds in Relation to Stock Market: A Vector Autoregressive Causality Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 191-201.
    8. Lukasz Lach & Henryk Gurgul, 2010. "International trade and economic growth in the Polish economy," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 3, pages 5-29.
    9. Rabab Mudakkar, Syeda & Zaman, Khalid & Shakir, Huma & Arif, Mariam & Naseem, Imran & Naz, Lubna, 2013. "Determinants of energy consumption function in SAARC countries: Balancing the odds," Renewable and Sustainable Energy Reviews, Elsevier, vol. 28(C), pages 566-574.
    10. László Kónya & Jai Pal Singh, 2007. "Causality between Indian Exports, Imports, and Agricultural, Manufacturing GDP," Working Papers 2007.02, School of Economics, La Trobe University.
    11. Emre Aksoy, 2013. "Relationships between Employment and Growth from Industrial Perspective by Considering Employment Incentives: The Case of Turkey," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 74-86.
    12. Mohsin Hasnain Ahmad & Shaista Alam & Mohammad Sabihuddin Butt, 2003. "Foreign Direct Investment, Exports, and Domestic Output in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 42(4), pages 715-723.
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    14. Judith Giles & Cara Williams, 2001. "Export-led growth: a survey of the empirical literature and some non-causality results. Part 1," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 9(3), pages 261-337.
    15. Judith A. Giles, 2000. "Testing for Two-Step Granger Noncausality in Trivariate VAR Models," Econometrics Working Papers 0008, Department of Economics, University of Victoria.
    16. Ghali, Khalifa H. & Trabelsi, Hédi, 2006. "Capital Ownership And Its Impact On International Trade And Economic Growth: The Tunisian Experience," MPRA Paper 78974, University Library of Munich, Germany.
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    19. Philip Kofi Adom, 2011. "Electricity Consumption-Economic Growth Nexus: The Ghanaian Case," International Journal of Energy Economics and Policy, Econjournals, vol. 1(1), pages 18-31, June.
    20. Fugarolas, Guadalupe & Mañalich, Isis & Matesanz, David, 2007. "Are Exports Causing Growth? Evidence On International Trade Expansion In Cuba, 1960-2004," MPRA Paper 6323, University Library of Munich, Germany.
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    More about this item

    Keywords

    cointegration; error correction model; vector autoregressive model; lag length selection; model selection methods; sequential testing; information criteria;

    JEL classification:

    • 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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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