Granger-Causality in Markov Switching Models

20 Pages Posted: 28 Nov 2006

See all articles by Monica Billio

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia

Silvio Di Sanzo

Universidad de Alicante

Date Written: March 2006

Abstract

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.

Keywords: Granger Causality, Markov Chains, Switching Models

JEL Classification: C53, C32

Suggested Citation

Billio, Monica and Di Sanzo, Silvio, Granger-Causality in Markov Switching Models (March 2006). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 20/WP/2006. Available at SSRN: https://ssrn.com/abstract=947672 or http://dx.doi.org/10.2139/ssrn.947672

Monica Billio (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

Silvio Di Sanzo

Universidad de Alicante ( email )

Campus de San Vicente
Carretera San Vicente del Raspeig
San Vicente del Raspeig, Alicante 03690
Spain

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