Using Monte Carlo methods, the properties of Granger causality test in stable VAR models are studied under the presence of different magnitudes of GARCH effects in the error terms. Analysis reveals that substantial GARCH effects influence the size properties of the Granger causality test, especially in small samples. The power functions of the test are usually slightly lower when GARCH effects are imposed among the residuals compared with the case of white noise residuals.
Mantalos, Panagiotis; Shukur, Ghazi; and Sjölander, Pär
"The Effect Of GARCH (1,1) On The Granger Causality Test In Stable VAR Models,"
Journal of Modern Applied Statistical Methods:
2, Article 12.
Available at: http://digitalcommons.wayne.edu/jmasm/vol6/iss2/12