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An international study of causality-in-variance: Interest rate and financial sector returns

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  • V. Alaganar
  • Ramaprasad Bhar

Abstract

We demonstrate that causality-in-variance test could be employed to model the direction and lags in information flow between two variables and to avoid misspecifications. We apply this methodology to test the causality between the financial sector returns and interest rates of the G7 countries and show that the direction and the lead/lag structure of causality in the mean and the variance are more complex and dynamic than that have previously been reported. In most cases, we found two-way information flow both at the mean and the volatility level. Causality results give us insights into (i) how and when information is impacted on different market segments, and (ii) design more objective bi-variate models with the appropriate lag structure. Copyright Academy of Economics and Finance 2003

Suggested Citation

  • V. Alaganar & Ramaprasad Bhar, 2003. "An international study of causality-in-variance: Interest rate and financial sector returns," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 27(1), pages 39-55, March.
    • Handle: RePEc:spr:jecfin:v:27:y:2003:i:1:p:39-55
    DOI: 10.1007/BF02751589
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    Cited by:

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    3. Bezemer, Dirk J & Grydaki, Maria, 2012. "Mortgage Lending and the Great moderation: a multivariate GARCH Approach," MPRA Paper 36356, University Library of Munich, Germany.
    4. Jammazi, Rania & Ferrer, Román & Jareño, Francisco & Hammoudeh, Shawkat M., 2017. "Main driving factors of the interest rate-stock market Granger causality," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 260-280.
    5. Yuki Toyoshima, 2018. "Testing for Causality-In-Mean and Variance between the UK Housing and Stock Markets," JRFM, MDPI, vol. 11(2), pages 1-10, April.
    6. Ferrer, Román & Bolós, Vicente J. & Benítez, Rafael, 2016. "Interest rate changes and stock returns: A European multi-country study with wavelets," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 1-12.
    7. González, Mariano, 2016. "Asymmetric causality in-mean and in-variance among equity markets indexes," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 49-68.
    8. Go Tamakoshi & Shigeyuki Hamori, 2014. "Causality-in-variance and causality-in-mean between the Greek sovereign bond yields and Southern European banking sector equity returns," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(4), pages 627-642, October.
    9. Kim Hiang Liow & Felix Schindler, 2014. "An Assessment of the Relationship between Public Real Estate and Stock Markets at the Local, Regional, and Global Levels," International Real Estate Review, Global Social Science Institute, vol. 17(2), pages 157-202.

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