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

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  • Zhang, Lingxiang
  • Zhang, Xiaotong

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.

Suggested Citation

  • Zhang, Lingxiang & Zhang, Xiaotong, 2011. "Spurious Granger causality between a broken-trend stationary process and a stochastic trend process," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 81(8), pages 1673-1681.
    • Handle: RePEc:eee:matcom:v:81:y:2011:i:8:p:1673-1681
    DOI: 10.1016/j.matcom.2011.01.008
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