Granger-causality in quantiles between financial markets: Using copula approach

Tae Hwy Lee and Weiping Yang

International Review of Financial Analysis, 2014, vol. 33, issue C, 70-78

Abstract: This paper considers the Granger-causality in conditional quantile and examines the potential of improving conditional quantile forecasting by accounting for such a causal relationship between financial markets. We consider Granger-causality in distributions by testing whether the copula function of a pair of two financial markets is the independent copula. Among returns on stock markets in the US, Japan and U.K., we find significant Granger-causality in distribution. For a pair of the financial markets where the dependent (conditional) copula is found, we invert the conditional copula to obtain the conditional quantiles. Dependence between returns of two financial markets is modeled using a parametric copula. Different copula functions are compared to test for Granger-causality in distribution and in quantiles. We find significant Granger-causality in the different quantiles of the conditional distributions between foreign stock markets and the US stock market. Granger-causality from foreign stock markets to the US stock market is more significant from UK than from Japan, while causality from the US stock market to UK and Japan stock markets is almost equally significant.

Keywords: Contagion in financial markets; Copula functions; Inverting conditional copula; Granger-causality in conditional quantiles (search for similar items in EconPapers)
JEL-codes: C5 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:33:y:2014:i:c:p:70-78

DOI: 10.1016/j.irfa.2013.08.008

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