Multivariate Subset Autoregressive Modelling with Zero Constraints for Detecting 'Overall Causality' - Financial and Economic Forecasting (Chapter 4)

28 Pages Posted: 8 Jan 2003

See all articles by Jack H.W. Penm

Jack H.W. Penm

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce

Jammie H. Penm

Independent

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management

Date Written: October 2002

Abstract

The necessary and sufficient condition to test for 'overall causality', i.e., the presence of Granger-causality and instantaneous causal relations, in a bivariate and trivariate autoregressive model with recursive form is discussed. It is argued that the conventional AR model (the reduced form AR) is a more straightforward and effective means of testing for 'overall causality'. To detect instantaneous causality it is proposed to select the best subset system in a residual regression system in conjunction with model selection criteria. The Canadian money-income-bank rate system is re-examined in this way and by using a previously proposed algorithm we identify the optimum multivariate subset AR with constraints to detect whether there is 'overall causality' in that system.

Keywords: Multivariate Subset Autoregressive Modelling, Zero Constraints, Detecting Overall Causality

JEL Classification: C22, C53, E31

Suggested Citation

Penm, Jack and Penm, Jammie H. and Terrell, R. Deane, Multivariate Subset Autoregressive Modelling with Zero Constraints for Detecting 'Overall Causality' - Financial and Economic Forecasting (Chapter 4) (October 2002). Available at SSRN: https://ssrn.com/abstract=358900 or http://dx.doi.org/10.2139/ssrn.358900

Jack Penm (Contact Author)

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce ( email )

Canberra, Australian Capital Territory 0200
Australia
+61 (02) 61250535 (Phone)
+61 (02) 61250087 (Fax)

Jammie H. Penm

Independent ( email )

61 (02) 62880126 (Phone)
61 (02) 61250087 (Fax)

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management ( email )

Sir Roland Wilson Building (120)
Canberra, Australian Capital Territory 0200
Australia

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