Testing for Granger causality in a system of more than two variables

Theologos Pantelidis

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: This paper provides useful guidelines to practitioners who investigate Granger causality within a system of more than two variables by means of the two-step procedure proposed by Cheung and Ng (Journal of Econometrics, 1996) and modified by Hong (Journal of Econometrics, 2001). First, a theoretical example highlights cases that can mislead the researcher into reporting false causal relations between the variables under scrutiny. Then, the size of the problem is revealed by means of Monte Carlo simulations. Finally, an empirical application that investigates causality-in-mean among six major European stock markets, illustrates the proper procedure to follow for correct inference.

Keywords: Causality-in-mean; causality-in-variance; misspecification; simulation. (search for similar items in EconPapers)
JEL-codes: C14 C22 (search for similar items in EconPapers)
Date: 2012-01, Revised 2012-01
New Economics Papers: this item is included in nep-ecm and nep-ets
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