Granger-Causality in Markov Switching Models
Ca Foscari University of Venice - Department of Economics
Silvio Di Sanzo
Universidad de Alicante
University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 20/WP/2006
In this paper we propose a new parametrisation of transition probabilities that allows us to characterize and test Granger-causality in Markov switching models by means of an appropriate specification of the transition matrix. Test for independence are also provided. We illustrate our methodology with an empirical application. In particular, we investigate the causality and interdependence between financial and economic cycles using a bivariate Markov switching model. When applied to U.S. data, we find that financial variables are useful for forecasting the direction of aggregate economic activity, and vice versa.
Number of Pages in PDF File: 20
Keywords: Granger Causality, Markov Chains, Switching Models
JEL Classification: C53, C32working papers series
Date posted: November 28, 2006
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