Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Nonlinear causality tests and multivariate conditional heteroskedasticity
T2 - a simulation study
AU - Pavlidis, Efthymios
AU - Paya, Ivan
AU - Peel, David
PY - 2013/2
Y1 - 2013/2
N2 - This paper assesses the performance of linear and nonlinear causality tests in the presence of multivariate conditional heteroskedasticity, exogenous volatility regressors, and additive volatility outliers. Monte Carlo simulations show that tests based on the least squares covariance matrix estimator can frequently lead to finding spurious Granger causality. The degree of oversizing tends to increase with the sample size and is substantially larger for the nonlinear test. On the other hand, heteroskedasticity-robust tests which are based on the Fixed Design Wild Bootstrap perform adequately in terms of size and power. Consequently, reliable causality in mean tests can be conducted without the need to specify a conditional variance function. As an empirical application, we re-examine the return-volume relationship.
AB - This paper assesses the performance of linear and nonlinear causality tests in the presence of multivariate conditional heteroskedasticity, exogenous volatility regressors, and additive volatility outliers. Monte Carlo simulations show that tests based on the least squares covariance matrix estimator can frequently lead to finding spurious Granger causality. The degree of oversizing tends to increase with the sample size and is substantially larger for the nonlinear test. On the other hand, heteroskedasticity-robust tests which are based on the Fixed Design Wild Bootstrap perform adequately in terms of size and power. Consequently, reliable causality in mean tests can be conducted without the need to specify a conditional variance function. As an empirical application, we re-examine the return-volume relationship.
KW - causality
KW - multivariate ARCH
KW - robust inference
KW - additive volatility outliers
KW - exogenous volatility regressors
KW - monte carlo simulations
U2 - 10.1515/snde-2012-0067
DO - 10.1515/snde-2012-0067
M3 - Journal article
VL - 17
SP - 297
EP - 312
JO - Studies in Nonlinear Dynamics and Econometrics
JF - Studies in Nonlinear Dynamics and Econometrics
SN - 1558-3708
IS - 3
ER -