Two-way Granger Causality Research Articles

Fourier Analysis of India's Implied Volatility Index

The objective of this study was to analyze and model periodic behavior observed in India's Nifty Implied Volatility (VIX) Index and to seek the origins of these previously unreported calendar variations. Implied volatility and its variations are important to understand as the pricing of many financial assets and derivatives depend upon this variable. A novel modeling approach to this task uses Fourier analysis for the first time in the literature of implied volatility and calendar effect modeling. For this purpose, daily closing levels for the Nifty VIX Index were gathered covering trading days from 2010 through January 2014. Time series of VIX levels after removing a trend line were tested for normality, stationarity, and autocorrelation. Nifty index and Nifty VIX data were also tested for two-way Granger causality. Detrended Nifty VIX levels were Fourier analyzed to determine primary Fourier frequencies contributing to VIX periodic behavior. A Fourier model of VIX movements was constructed using four primary frequencies from the Fourier power spectrum. This model showed surprising accuracy in identifying the temporal location of VIX peaks and troughs. The probable origin of one recurring VIX calendar frequency was traced to India's earnings release cycle.

Research on the Dynamic Relationship between Energy Consumption Structure and Economic Growth in China

With the increasingly development of economy in China, economic growth and efficient use of energy is a hot topic in recent years, also China is under pressure of carbon emissions reductions during the process of economic development. This paper try to do a research to find weather the structure of energy consumption and economic growth exist long-term dynamic equilibrium relationship. Based on VAR model, though Granger causality test, impulse response and variance decomposition, combined with China's development of low-carbon economy, in the years between1978 to 2012 , four results has been showed: First, China's economic growth and energy consumption exist a stable long-run equilibrium relationship. Second, at the 1% level, there is a two-way Granger causality coal consumption and economic growth. Third, in lag 4, the energy consumption is produced positive effects on economic growth and the impact of coal consumption has maximum affect. Forth, the development and utilization of renewable energy is an effective way to solve China's economic development and energy constraints contradictory.

Foreign Direct Investment and Economic Growth: The Case of Developing African Economies

This paper uses annual balanced panel data to examine the Granger causal link between foreign direct investment (FDI) and economic growth (measured by real GDP growth) for 23 African countries covering the period from 1970 to 2011. Using recently developed panel econometric techniques the present paper takes into account non-stationary and cross-section dependency in the dataset when analyzing the growth-FDI nexus. The empirical results indicate two-way Granger causality link between FDI and economic growth. Furthermore, we show that this causal link is not homogeneous among individual countries in our sample. More specifically, we observe unidirectional causality from FDI to GDP growth in Egypt, Gabon, and Mauritania, and from GDP growth to FDI in Cote d’Ivoire, Kenya, South Africa and Zambia. Our main finding remains robust to estimation between FDI as a fraction of gross capital formation and real GDP growth.

Investigating the granger causality relationship between the consumption of different oil products and economic growth in Iran

In light of the recent implementation of subsidy reform plan and the elimination of subsidies for energy carrier prices and, in particular, for oil product prices in Iran, and the pressing need for providing clearer and more effective policy guidelines to help advance the plan, the present study is an attempt to explore the relationship between the consumption of different oil products and economic growth. This study primarily seeks to determine whether a Granger causality relationship exists between the consumption of different oil products and economic growth. And, if so, is it unidirectional or bidirectional? To answer the above questions, the author has applied vector autoregressive and vector error correction model (VECM), using quarterly data from 1988 to 2008. The results indicate that, in short-run, none of oil products consumption stimulates economic growth. But the economic growth Granger causes the consumption of gas oil and gasoline. There is also a weak Granger causality from economic growth to consumption of fuel oil and kerosene. There is no relationship between economic growths and liquid gas. In the long run, there exist a two-way Granger causality relationship between fuel oil consumption and economic growth and a one-way Granger causality relationship from economic growth to the consumption of gas oil and, there is not any relationship between the consumption of other products and economic growth. The results suggest that the reduction of oil products consumption (except fuel oil consumption), due to price increases resulting from removal of subsidies, will not negatively affect the economic growth and, hence, we can pursue the subsidy reform plan on oil products without decelerating economic growth.

The Relationship between Oil Consumption and Employment – Based on Data from Twenty Provinces

This paper discusses the relationship between oil consumption and employment growth in 20 provinces of China. In the study, we mainly use the methods of co-integration and Granger causality. The result indicateds that in different kinds of provinces, there are different kinds of Granger causality between oil consumption and employment. In some provinces, such as Shandong province, Liaoning province and Zhejiang province, there exists one-way Granger causality between the two variables; in Jiangxi province, there exists two-way Granger Causality; while in other provinces, there is no Granger Causality among them. The result is highly correlated with the industrial structure, the structure of economic development and the preferences of energy resources in certain cities.

Energy use, exports, imports and GDP: New evidence from the OECD countries

This paper aims to investigate the relationship between energy use-GDP, energy use-exports-trade and energy use-imports on aggregate level in the OECD countries. While the energy use-growth nexus is widely examined in the literature, studies on the energy use-trade nexus are very scarce. Thus, this study also serves to fill this gap by presenting a new research on the OECD countries. We employ the panel cointegration technique and use the Granger representation theorem to examine the presence of long-run relationship and the causality between pairs of variables. To investigate the presence of causality, several tests developed by Canning and Pedroni (2008) are used. We find that the pairs of energy use-GDP, energy use-exports and energy use-imports are cointegrated and there is two-way Granger causality between each pairs. We also estimate the long-run elasticities by employing panel dynamic ordinary least squares. The results suggest that the sign of long-run elasticity is positive for all pairs. Particularly, 1% increase in GDP, export and import causes almost 0.32%, 0.21% and 0.16% increase in energy use respectively.

Does insurance activity promote economic growth? Further evidence based on bootstrap panel Granger causality test

This study applies the bootstrap panel Granger causality test to test whether insurance activity promotes economic growth, using data from 10 OECD countries over the period of 1979–2006. Empirical results indicate that one-way Granger causality running from all insurance activities to economic growth for France, Japan, Netherlands, Switzerland, and the UK, and economic growth Granger causes insurance activities in Canada (for life insurance), Italy (for total and life insurance) and the USA (for total and non-life insurance). There is a two-way Granger causality between life insurance activity and economic growth in the USA, while no causality between insurance activities and economic growth is found in Belgium (for all insurance), Canada (for total and non-life insurance), Italy (for non-life insurance) and Sweden (for life insurance). Our results also confirm the finding of Ward and Zurbruegg [Does insurance promote economic growth? Evidence from OECD economies. Journal of Risk and Insurance 67, no. 4: 489–506] showing that the insurance–growth nexus varies across countries, since their paper have previously demonstrated heterogeneity in this vein. In an analysis of a broader, though overlapping 17-country sample and taking into account banking activities, the results suggest the importance of including banking activities when investigating the insurance–growth relationship.

Relationship between Commodity Prices and Exchange Rate in Light of Global Financial Crisis: Evidence from Australia

This study seeks to identify major factors behind recent fluctuations in Australian dollar. Using quarterly data for over 30 years and cointegration and error correction models, we found that in the long run exchange rate is determined by commodity prices, interest rate and other factors such as Global Financial Crisis. We found two-way Granger causality between exchange rate and commodity prices, but one-way Granger causality from Global Financial Crisis to commodity prices. The implications of our findings is that by providing substantial incentives to Australian producers, the policy makers in Australia can ensure competitive commodity prices and exchange rate. Portfolio managers could also benefit from our findings knowing the mechanism of Global Financial Crisis impacting Australian dollar.

Stock Market Spread Trading: Argentina and Brazil Stock Indices

Brazil is the largest stock market in South America, whereas Argentina is one of the smallest. Nonetheless, the most important stock indices representing these markets (the Brazil Bovespa and the Argentinian Merval) are highly correlated with two-way Granger causality. This feature facilitates trading of the spread between these two markets, measured as the ratio of the Bovespa to the Merval. We identify the presence of a temporal fractal structure in daily changes in this ratio using statistical techniques based on rescaled range analysis after accommodating short-term autocorrelation. This series has episodes of both positive and negative dependence, though the positive dependent relationship appears to be dominant. When a simple trading rule, based upon the Hurst coefficient, is applied we find that episodes of fractality may be exploited by traders. Under some circumstances these strategies are more profitable than economic gains from simple moving average systems, which exploit the autocorrelation structure of the series.

Nonlinear Relation between Inflation and Economic Growth: Evidence from China

By using the quarterly data of CPI and GDP in China from 1992 to 2011, this paper builds a smooth transition regression (STR) model to study the nonlinear relation between inflation and economic growth. The results show that there exist two-way Granger causality relations between inflation and economic growth, and inflation has significant nonlinear impacts to economic growth.

A Study of the Nonlinear Relation between Exchange Rate and Fiscal Revenue in China

This paper uses smooth transition regression (STR) model to study the nonlinear relation between the exchange rate of US dollar against RMB and the fiscal revenue in China. The research results show that there exists the two-way Granger causality relations between exchange rate and fiscal revenue, and exchange rate has significant nonlinear impacts to fiscal revenue.

An Empirical Analysis on the Relationship between Chinese Economic Growth and Inflation During 1953-2007

This paper focuses on doing an empirical analysis on the relationship between the Chinese economic growth and inflation by using the econometric models of ARDL, VAR and VECM during the three different periods of 1953-1978, 1979-2007 and 1953-2007. The empirical analysis has achieved four results. Firstly, it has approved that the structure relation between the Chinese economic growth and inflation has been changed since 1979. Secondly, the correlation between the Chinese economic growth and inflation was substantial negative during 1953-1978; however, it became substantial positive during 1979-2007. Thirdly, there was not any Granger causality relation between the Chinese economic growth and inflation during 1953-1978, but there was a two-way Granger causality between them during 1979-2007 in the short run and long run. Finaly, the unequilibrium between the Chinese economic growth and inflation could be adjusted during 1979-2007, but it was inversely during 1953-1978.

Re-examining the financial development and economic growth nexus in Kenya

This paper re-examines the causal relationship between financial development and economic growth in Kenya for the period 1966–2005 within a quadvariate vector autoregressive (VAR) framework by including exports and imports as additional variables to the finance–economic growth nexus. We use four conventionally accepted proxies for financial development, namely money supply (M2), liquid liabilities (M3), domestic bank credit to the private sector and total domestic credit provided by the banking sector (all percent of GDP). Applying a modified version of the Granger causality test due to Toda and Yamamoto [Toda, H.Y. and Yamamoto, T., Statistical inference in vector autoregressions with possibly integrated process. Journal of Econometrics 1995; 66; 225–250], our empirical results suggest that in three out of the four measures of financial development we found evidence of a two-way Granger causality: (1) between domestic credit provided by the banking sector and economic growth; (2) between total domestic credit provided by the banking sector and economic growth, and (3) between liquid liabilities and economic growth. This implies that neither the supply-leading nor the demand-following hypotheses are supported in Kenya and that economic growth and financial development are jointly determined, or they complement each other. A major implication of our finding is that financial development promotes economic growth in Kenya and that policies at enhancing the development of the financial sector can help to spur economic growth.

Liquidity and The Law of One Price: The Case of the Cash/Futures Basis

Deviations from no-arbitrage relations should be related to frictions associated with transacting; in particular to market illiquidity, because frictions impede arbitrage. Thus, financial market liquidity may play a key role in moving prices to fair values. At the same time, a wide futures/cash basis may trigger arbitrage trades and thereby affect liquidity. We test these ideas by studying the joint dynamic structure of aggregate NYSE market liquidity and the NYSE Composite index futures basis for a relatively long time-period, over 3000 trading days. We find that liquidity and the basis forecast each other in addition to being contemporaneously correlated. There is evidence of two-way Granger causality between the short-term absolute basis and effective spreads, and quoted and effective spreads Granger-cause longer-term absolute bases. These results are preserved after including a proxy for arbitrage financing costs, the Federal Funds rate, which bears an independent positive and significant relation with the short-term absolute basis. Impulse response functions indicate that shocks to the absolute basis predict future stock market liquidity. Overall, the evidence suggests that stock market liquidity enhances the efficiency of the futures/cash pricing system.

Causality between trade and tourism: empirical evidence from China

Current literature concerning tourism forecasting points out the role played by international trade in affecting international tourism flows. This study investigates the nature of causal relationship, if any, between international tourism and international trade flows using the case of China. The study applies the Granger no-causality procedure developed by Toda and Yamamoto in a vector autoregresion (VAR) model, and attempts to improve previous tourism forecasting studies, in the context of tourist demand function, by identifying the direction of the endogeniety between tourist travel and international trade. Findings indicate a two-way Granger causality between international travel and international trade and hence imply that trade flows do link with tourism in the case of China. Thus, previous tourism forecasting studies using a single equation approach may lead to biased estimates since they fail to consider possible feedbacks between international trade and international tourism.

Export-led growth and the US economy: some further testing

The export-led growth hypothesis is tested using quarterly time series data for the US economy using the Granger no-causality procedure, developed by Toda and Yamamoto (Journal of Economics, 66, 1995), in a six-variable vector autoregression (VAR) model. Moreover, we follow Riezman, Whiteman and Summers (Empirical Economics, 21, 1996) to test the export-led growth hypothesis while controlling for the growth of imports to avoid producing a spurious causality result; and finally, the empirical results are tested for the robustness using different lag structures. The findings in the paper indicate a two-way Granger causality between output and exports, a result from earlier export-growth studies on the US economy.

Dynamic linkages and Granger causality between short-term US corporate bond and stock markets

It is sought to investigate a possible long-run association and Granger causality between US stock and short-term corporate bond markets by applying the well-known cointegration and error-correction methodology. The unit root tests reveal that the rates of return from S&P 500 and short-term US corporate bond yields are non-stationary in levels. The ADF test finds them cointegrated at 1, 5 and 10% levels of significance. The estimated error-correction model confirms a long-run relationship between these two markets. The short-term US corporate bond market appears to Granger-cause the US stock market in the long run. Furthermore, there appears to be a two-way short-run Granger causality and reversible feedback between these two markets.