Spurious Granger causality between a broken-trend stationary process and a stochastic trend process

Lingxiang Zhang and Xiaotong Zhang

Mathematics and Computers in Simulation (MATCOM), 2011, vol. 81, issue 8, 1673-1681

Abstract: This paper examines spurious Granger causality between a trend stationary process with structural breaks and a stochastic trend process. Monte Carlo simulations show that whether or not there are deterministic variables in the testing models, the sample size and the parameter values of the data generation process can affect the empirical frequencies of spurious Granger causality relations in different degrees. The analysis also points out that an alternative rank-based causality test method can avoid the risk of spurious causality to some extent by adopting an intercept and deterministic trend term in the testing regressions.

Keywords: Granger causality; Spurious rejection; Structural break; Stochastic trend (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:81:y:2011:i:8:p:1673-1681

DOI: 10.1016/j.matcom.2011.01.008

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