A response surface analysis of critical values for the lead‐lag ratio with application to high frequency and non‐synchronous financial data

Michael O'Neill and Gulasekaran Rajaguru ()

Accounting and Finance, 2020, vol. 60, issue 4, 3979-3990

Abstract: Granger causality tests are being supplanted by new methods such as the Lead‐Lag Ratio, particularly in finance where data arrives at random times and systematic sampling often produces spurious results. Existing approaches are insufficient; outside of block‐sampling using a bootstrap, the lead‐lag ratio has generally been assessed against a benchmark of 1 without regard for statistical significance. We use simulations to generate a response surface for the Lead‐Lag Ratio. Our modelled critical values are applied to reassess the findings of three previous studies of lead/lag relations between financial return series with high frequency data. Our response surface method proves to be a convenient and efficient alternative to using a bootstrap.

Date: 2020
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