Predictive Testing for Granger Causality via Posterior Simulation and Cross-validation

Abstract

This chapter develops a predictive approach to Granger causality (GC) testing that utilizes k -fold cross-validation and posterior simulation to perform out-of-sample testing. A Monte Carlo study indicates that the cross-validation predictive procedure has improved power in comparison to previously available out-of-sample testing procedures, matching the performance of the in-sample F-test while retaining the credibility of post- sample inference. An empirical application to the Phillips curve is provided evaluating the evidence on GC between inflation and unemployment rates.

Citation

Cornwall, G.J., Mills, J.A., Sauley, B.A. and Weng, H. (2019), "Predictive Testing for Granger Causality via Posterior Simulation and Cross-validation", Topics in Identification, Limited Dependent Variables, Partial Observability, Experimentation, and Flexible Modeling: Part A (Advances in Econometrics, Vol. 40A), Emerald Publishing Limited, Leeds, pp. 275-292. https://doi.org/10.1108/S0731-90532019000040A012