Testing Causality Between Two Vectors in Multivariate GARCH Models

Tomasz Woźniak

No ECO2012/20, Economics Working Papers from European University Institute

Abstract: Spillover and contagion effects have gained significant interest in the recent years of financial crisis. Attention has not only been directed to relations between returns of financial variables, but to spillovers in risk as well. I use the family of Constant Conditional Correlation GARCH models to model the risk associated with financial time series and to make inferences about Granger causal relations between second conditional moments. The restrictions for second-order Granger noncausality between two vectors of variables are derived. To assess the credibility of the noncausality hypotheses, I employ posterior odds ratios. This Bayesian method constitutes an alternative for classical tests that makes such testing possible, regardless of the form of the restrictions on the parameters of the model. Moreover, it relaxes the assumptions about the existence of higher-order moments of the processes required in classical tests. In the empirical example, I find that the pound-to-Euro exchange rate second-order causes the US dollar-to-Euro exchange rate, which confirms the meteor shower hypothesis of Engle, Ito & Lin (1990).

Keywords: Second-Order Causality; Volatility Spillovers; Posterior Odds; GARCH Models (search for similar items in EconPapers)
JEL-codes: C11 C12 C32 C53 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ets
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Testing causality between two vectors in multivariate GARCH models (2015)
Working Paper: Testing Causality Between Two Vectors in Multivariate GARCH Models (2012)
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