"Change Detection and the Causal Impact of the Yield Curve

Stan Hurn (), Peter Phillips and Shuping Shi

No 2058, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Causal relationships in econometrics are typically based on the concept of predictability and are established in terms of tests for Granger causality. These causal relationships are susceptible to change, especially during times of financial turbulence, making the real-time detection of instability an important practical issue. This paper develops a test for detecting changes in causal relationships based on a recursive rolling window, which is analogous to the procedure used in recent work on financial bubble detection. The limiting distribution of the test takes a simple form under the null hypothesis and is easy to implement in conditions of homoskedasticity, conditional heteroskedasticity and unconditional heteroskedasticity. Simulation experiments compare the efficacy of the proposed test with two other commonly used tests, the forward recursive and the rolling window tests. The results indicate that both the rolling and the recursive rolling approaches offer good finite sample performance in situations where there are one or two changes in the causal relationship over the sample period, although the performance of the rolling window algorithm seems to be the best. The testing strategies are illustrated in an empirical application that explores the causal impact of the slope of the yield curve on real economic activity in the United States over the period 1985�2013.

Keywords: Causality; Forward recursion; Hypothesis testing; Output; Recursive rolling test; Rolling window; Yield curve (search for similar items in EconPapers)
JEL-codes: C12 C15 C32 G17 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2016-12
New Economics Papers: this item is included in nep-ecm and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published in Journal of Time Series Analysis, (November 2018), 39(6): 966-987

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Related works:
Journal Article: Change Detection and the Causal Impact of the Yield Curve (2018)
Working Paper: Change Detection and the Casual Impact of the Yield Curve (2015)
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