A Bayesian flexible model for testing Granger causality

Abstract

A new Bayesian hypothesis testing procedure for evaluating the Granger causality between two or more time series is proposed. The test is based on a flexible model for the joint evolution of multiple series, where a latent binary matrix indicates whether there is a Granger-causal relationship between such time series. The model is specified through a dependent Geometric stick-breaking process that generalizes the standard parametric Gaussian vector autoregression model, whereas the prior distribution of the latent matrix ensures a multiple testing correction. A Monte Carlo simulation study is provided for comparing the robustness of the proposed hypothesis test with state-of-the-art alternatives. The results show that this proposal performs better than competing approaches. Finally, the new test is applied to real economic data.