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The Effect of the Spillover on the Granger Causality Test
Lund University.
Linnaeus University, Faculty of Business, Economics and Design, Linnaeus School of Business and Economics. (Nationalekonomi och statistik /CAFO)ORCID iD: 0000-0002-3416-5896
2010 (English)In: Journal of Applied Statistics, ISSN 0266-4763, E-ISSN 1360-0532, Vol. 37, no 9, p. 1473-1486Article in journal (Refereed) Published
Abstract [en]

In this paper, we investigate the properties of the Granger causality test in stationary and stable vector autoregressive models under the presence of spillover effects, i.e., causality in variance. The Wald test and the WW test (the Wald test with White’s proposed heteroskedasticity-consistent covariance matrix estimator imposed) are analyzed. The investigation is undertaken by using Monte Carlo simulation in which two different sample sizes and six different kinds of data generating process are used. The results show that the Wald test overrejects the null hypothesis both with and without the spillover effect, and that the overrejection in the latter case is more severe in larger samples. The size properties of the WW test are satisfactory when there is spillover between the variables. Only when there is feedback in the variance is the size of the WW test slightly affected. The Wald test is shown to have higher power than the WW test when the errors follow a GARCH(1,1) process without a spillover effect. When there is spillover, the power of both tests deteriorates, which implies that the spillover has a negative effect on the causality tests.

Place, publisher, year, edition, pages
Taylor & Francis, 2010. Vol. 37, no 9, p. 1473-1486
Keywords [en]
causality in variance, GARCH, Granger causality, volatility spillover
National Category
Economics
Research subject
Statistics/Econometrics
Identifiers
URN: urn:nbn:se:lnu:diva-9179DOI: 10.1080/02664760903046094OAI: oai:DiVA.org:lnu-9179DiVA, id: diva2:359346
Available from: 2010-10-27 Created: 2010-10-27 Last updated: 2017-12-12Bibliographically approved

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CiteExportLink to record
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