Applicability of the Granger causality test
ZHOU Jian, LI Zinai (School of Economics and Management, Tsinghua University, Beijing 100084, China)
This paper studies the applicability of the Granger causality test for small samples. A Monte Carlo simulation was used for a first-lag model example with 27 possible data generation processes. The simulation was used to study the relations effects of various factors, including the stability of the series, the sample size, and the dependence between samples in the series. The results show that the instability of the series is one of the most important factors resulting in false causality. For two stationary series the probability of finding Granger causality increases with sample size and the significance of the dependence between series.