Assuming that you have a VAR model with 2 variables (A and B) including many lags, how can you test whether A cause Granger-causes changes in B?
A) By observing if the differences in correlation between A and B are statistically significant
B) Impose restrictions that all the coefficients of the lags of A are equal to 0 in the equation for B of the VAR model and test the joint hypothesis within the F-test framework
C) Impose restrictions that all the coefficients of the lags of B are equal to 0 in the equation for A of the VAR model and test the joint hypothesis within the F-test framework
D) None of the above

Question

Quizplus · Accepted Answer

Granger causality in a VAR model is tested by imposing restrictions that all coefficients of the lags of the causing variable (in this case, A) are equal to 0 in the equation of the affected variable (B), and then testing these restrictions jointly, typically using an F-test. This approach directly assesses whether past values of A have a statistically significant effect on B.

Assuming That You Have a VAR Model with 2 Variables