HOW TO SELECT A REASONABLE LAG ORDER FOR TESTING LINEAR GRANGER CAUSALITY?

Wang Sheng (P. R. China)

Received August 4, 2006

Abstract

We derive a new criterion for the optimal and efficient selection of the number of lags in the context of testing linear Granger causality environment in the sense of theory and empirics respectively, which may be better in empirics than those suggested and advocated by Davidson and Mackinnon, Hsiao, and Schwarz. The structural stability of Granger causality can be effectively achieved based on our criterion, but not based on those criterions given by Davidson and Mackinnon, Hsiao, and Schwarz. Some new notations are firstly defined, such as attenuation rate of Granger cause, structural stability of Granger causality, and order of the structural stability of Granger causality.

Keywords and phrases: Granger causality, attenuation rate of Granger cause, structural stability of Granger causality, order of the structural stability of Granger causality.