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Essays in Econometrics

This book, and its companion volume in the Econometric Society Monographsseries (ESM No. 32), present a collection of papers by Clive W. J. Granger. Hiscontributions to economics and econometrics, many of them seminal, span morethan four decades and touch on all aspects of time series analysis. The papersassembled in this volume explore topics in causality, integration and cointegra-tion, and long memory. Those in the companion volume investigate themes inspectral analysis, seasonality, nonlinearity, methodology, and forecasting. The two volumes contain the original articles as well as an introduction written bythe editors.

Eric Ghysels is Edward M. Bernstein Professor of Economics and Professor ofFinance at the University of North Carolina, Chapel Hill. He previously taughtat the University of Montreal and Pennsylvania State University. ProfessorGhysels’s main research interests are time series econometrics and finance. Hehas served on the editorial boards of several academic journals and has publishedmore than sixty articles in leading economics, finance, and statistics journals.

Norman R. Swanson is Associate Professor of Economics at Texas A&M Uni-versity and formerly taught at Pennsylvania State University. He received hisdoctorate at the University of California, San Diego, where he studied theoret-ical, financial, and macroeconomics under Clive Granger’s tutelage. ProfessorSwanson is an associate editor for numerous academic journals and is the authorof more than thirty refereed articles and research papers.

Mark W. Watson is Professor of Economics and Public Affairs at the WoodrowWilson School, Princeton University. He previously served on the faculties ofHarvard and Northwestern Universities and as associate editor of Econometrica,the Journal of Monetary Economics, and the Journal of Applied Econometricsand currently is a Research Associate of the National Bureau of EconomicResearch (NBER) and consultant at the Federal Reserve Bank of Richmond.Professor Watson is a Fellow of the Econometric Society and currently holdsresearch grants from NBER and the National Science Foundation.

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Cambridge University Press052179207X - Causality, Integration and Cointegration, and Long MemoryEdited by Eric Ghysels, Norman R. Swanson and Mark W. WatsonFrontmatterMore information

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http://www.cambridge.org/052179207X

Econometric Society Monographs No. 33

Editors:Peter Hammond, Stanford UniversityAlberto Holly, University of Lausanne

The Econometric Society is an international society for the advancement of economic theory in relation to statistics and mathematics. The Econometric Society Monograph Series is designed topromote the publication of original research contributions of high quality in mathematical economicsand theoretical and applied econometrics.

Other titles in the series:G. S. Maddala Limited-dependent and qualitative variables in econometrics, 0 521 33825 5Gerard Debreu Mathematical economics: Twenty papers of Gerard Debreu, 0 521 33561 2Jean-Michel Grandmont Money and value: A reconsideration of classical and neoclassical monetary

economics, 0 521 31364 3Franklin M. Fisher Disequilibrium foundations of equilibrium economics, 0 521 37856 7Andreu Mas-Colell The theory of general economic equilibrium: A differentiable approach,

0 521 26514 2, 0 521 38870 8Cheng Hsiao Analysis of panel data, 0 521 38933 XTruman F. Bewley, Editor Advances in econometrics – Fifth World Congress (Volume I),

0 521 46726 8Truman F. Bewley, Editor Advances in econometrics – Fifth World Congress (Volume II),

0 521 46725 XHerve Moulin Axioms of cooperative decision making, 0 521 36055 2, 0 521 42458 5L. G. Godfrey Misspecification tests in econometrics: The Lagrange multiplier principle and other

approaches, 0 521 42459 3Tony Lancaster The econometric analysis of transition data, 0 521 43789 XAlvin E. Roth and Marilda A. Oliviera Sotomayor, Editors Two-sided matching: A study in

game-theoretic modeling and analysis, 0 521 43788 1Wolfgang Härdle, Applied nonparametric regression, 0 521 42950 1Jean-Jacques Laffont, Editor Advances in economic theory – Sixth World Congress (Volume I),

0 521 48459 6Jean-Jacques Laffont, Editor Advances in economic theory – Sixth World Congress (Volume II),

0 521 48460 XHalbert White Estimation, inference and specification, 0 521 25280 6, 0 521 57446 3Christopher Sims, Editor Advances in econometrics – Sixth World Congress (Volume I),

0 521 56610 XChristopher Sims, Editor Advances in econometrics – Sixth World Congress (Volume II),

0 521 56609 6Roger Guesnerie A contribution to the pure theory of taxation, 0 521 23689 4, 0 521 62956 XDavid M. Kreps and Kenneth F. Wallis, Editors Advances in economics and econometrics – Seventh

World Congress (Volume I), 0 521 58011 0, 0 521 58983 5David M. Kreps and Kenneth F. Wallis, Editors Advances in economics and econometrics – Seventh

World Congress (Volume II), 0 521 58012 9, 0 521 58982 7David M. Kreps and Kenneth F. Wallis, Editors Advances in economics and econometrics – Seventh

World Congress (Volume III), 0 521 58013 7, 0 521 58981 9Donald P. Jacobs, Ehud Kalai, and Morton I. Kamien, Editors Frontiers of research in economic

theory: The Nancy L. Schwartz Memorial Lectures, 1983–1997, 0 521 63222 6, 0 521 63538 1A. Cohn Cameron and Pravin K. Trivedi, Regression analysis of count data, 0 521 63201 3,

0 521 63567 5Steinar Strøm, Editor Econometrics and economic theory in the 20th century: The Ragnar Frisch

Centennial Symposium, 0 521 633230, 0 521 633656Eric Ghysels, Norman R. Swanson, and Mark Watson, Editors Essays in econometrics: Collected

papers of Clive W. J. Granger (Volume I), 0 521 77297 4, 0 521 80401 8, 0 521 77496 9, 0 521 79697 0Eric Ghysels, Norman R. Swanson, and Mark Watson, Editors Essays in econometrics: Collected

papers of Clive W. J. Granger (Volume II), 0 521 79207 X, 0 521 80401 8, 0 521 79649 0,0 521 79697 0






CLIVE WILLIAM JOHN GRANGER






Essays in EconometricsCollected Papers of Clive W. J. Granger

Volume II: Causality, Integration andCointegration, and Long Memory

Edited by

Eric GhyselsUniversity of North Carolinaat Chapel Hill

Norman R. SwansonTexas A&M University

Mark W. WatsonPrinceton University






published by the press syndicate of the university of cambridgeThe Pitt Building, Trumpington Street, Cambridge, United Kingdom

cambridge university pressThe Edinburgh Building, Cambridge CB2 2RU, UK40 West 20th Street, New York, NY 10011-4211, USA10 Stamford Road, Oakleigh, VIC 3166, AustraliaRuiz de Alarcón 13, 28014 Madrid, SpainDock House, The Waterfront, Cape Town 8001, South Africa


© Cambridge University Press 2001

This book is in copyright. Subject to statutory exceptionand to the provisions of relevant collective licensing agreements,no reproduction of any part may take place withoutthe written permission of Cambridge University Press.

First published 2001

Printed in the United States of America

Typeface Times Roman 10/12 pt. System QuarkXPress [BTS]

A catalog record for this book is available from the British Library.

Library of Congress Cataloging in Publication DataGranger, C. W. J. (Clive William John), 1934–

Essays in econometrics: collected papers of Clive W. J. Granger / edited by Eric Ghysels, Norman R. Swanson, Mark W. Watson.

p. cm. – (Econometric Society monographs; v. 32)Contents: v. 1. Spectral analysis, seasonality, nonlinearity, methodology, and

forecasting – v. 2. Causality, integration and cointegration, and long memory.ISBN 0-521-79697-0 (set : pbk.) – ISBN 0-521-77297-4 (v. 1) – ISBN 0-521-77496-9

(v. 1 : pbk.) – ISBN 0-521-79207-X (v. 2) – ISBN 0-521-79649-0 (v. 2 : pbk.)1. Econometrics. I. Title: Collected papers of Clive W. J. Granger. II. Ghysels,

Eric, 1956– III. Swanson, Norman R. (Norman Rasmus), 1964– IV. Watson,Mark W. V. Title. VI. Series.

HB139.G69 2001330¢.01¢5195–dc21

00-034306

ISBN 0 521 79207 x hardbackISBN 0 521 79649 0 paperbackISBN 0 521 79697 0 paperback set






To Clive W. J. Granger:Mentor, Colleague, and Friend.We are honored to present this selectionof his research papers.

E. G.N. R. S.M. W. W.






Contents

Acknowledgments page xiiiList of Contributors xvii

Introduction 1eric ghysels, norman r. swanson, and mark watson

PART ONE: CAUSALITY

1. Investigating Causal Relations by Econometric Models and Cross-Spectral Methods, c. w. j. granger,Econometrica, 37, 1969, pp. 424–38. Reprinted in Rational Expectations, edited by j. sargent and r.lucas, 1981, University of Minnesota Press. 31

2. Testing for Causality: A Personal Viewpoint,c. w. j. granger, Journal of Economic Dynamics and Control, 2, 1980, pp. 329–52. 48

3. Some Recent Developments in a Concept of Causality,c. w. j. granger, Journal of Econometrics, 39, 1988,pp. 199-211. 71

4. Advertising and Aggregate Consumption: An Analysis of Causality, r. ashley, c. w. j. granger and r. schmalensee, Econometrica, 48, 1980, pp. 1149–67. 84

PART TWO: INTEGRATION AND COINTEGRATION

5. Spurious Regression in Econometrics, c. w. j. grangerand p. newbold, Journal of Econometrics, 2, 1974,pp. 111–20. 109

6. Some Properties of Time Series Data and Their Use in Econometric Model Specification, c. w. j. granger,Journal of Econometrics, 16, 1981, pp. 121–30. 119






7. Time Series Analysis of Error Correction Models,c. w. j. granger and a. a. weiss, in Studies in Econometrics: Time Series and Multivariate Statistics,edited by s. karlin, t. amemiya, and l. a. goodman,Academic Press, New York, 1983, pp. 255–78. 129

8. Co-Integration and Error-Correction: Representation,Estimation, and Testing, r. engle and c. w. j. granger,Econometrica, 55, 1987, pp. 251–76. 145

9. Developments in the Study of Cointegrated EconomicVariables, c. w. j. granger, Oxford Bulletin of Economics and Statistics, 48, 1986, pp. 213–28. 173

10. Seasonal Integration and Cointegration, s. hylleberg,r. f. engle, c. w. j. granger, and b. s. yoo, Journal of Econometrics, 44, 1990, pp. 215–38. 189

11. A Cointegration Analysis of Treasury Bill Yields, a. d.hall, h. m. anderson, and c. w. j. granger, Review of Economics and Statistics, 74, 1992, pp. 116–26. 212

12. Estimation of Common Long Memory Components in Cointegrated Systems, j. gonzalo and c. w. j. granger, Journal of Business and Economic Statistics, 13, 1995, pp. 27–35. 232

13. Separation in Cointegrated Systems and Persistent-Transitory Decompositions,c. w. j. granger and n. haldrup, Department of Economics, Oxford Bulletin of Economics and Statistics, 59, 1997, pp. 449–64. 254

14. Nonlinear Transformations of Integrated Time Series,c. w. j. granger and j. hallman, Journal of Time Series Analysis, 12, 1991, pp. 207–24. 269

15. Long Memory Series with Attractors, c. w. j. granger and j. hallman, Oxford Bulletin of Economics and Statistics, 53, 1991, pp. 11–26. 286

16. Further Developments in the Study of Cointegrated Variables, c. w. j. granger and n. r. swanson,Oxford Bulletin of Economics and Statistics, 58, 1996,pp. 374–86. 302

PART THREE: LONG MEMORY

17. An Introduction to Long-Memory Time Series Models and Fractional Differencing, c. w. j. granger and r. joyeux, Journal of Time Series Analysis, 1, 1980,pp. 15–29. 321

x Contents






18. Long Memory Relationships and the Aggregation of Dynamic Models, c. w. j. granger, Journal of Econometrics, 14, 1980, pp. 227–38. 338

19. A Long Memory Property of Stock Market Returns and a New Model, z. ding, c. w. j. granger and r. f. engle, Journal of Empirical Finance, 1, 1993,pp. 83–106. 349

Index 373

Contents xi






Acknowledgments

Grateful acknowledgment is made to the following publishers andsources for permission to reprint the articles cited here.

ACADEMIC PRESS

“Non-Linear Time Series Modelling,” with A. Andersen, Applied TimeSeries Analysis, edited by David F.Findley,1978,Academic Press,25–38.

“Time Series Analysis of Error Correction Models,” with A. A. Weiss, inStudies in Econometrics: Time Series and Multivariate Statistics, editedby S. Karlin, T. Amemiya, and L. A. Goodman, Academic Press, NewYork, 1983, 255–78.

AMERICAN STATISTICAL ASSOCIATION

“Is Seasonal Adjustment a Linear or Nonlinear Data-Filtering Process?”with E. Ghysels and P. L. Siklos, Journal of Business and Economic Statistics, 14, 1996, 374–86.

“Semiparametric Estimates of the Relation Between Weather and Elec-tricity Sales,” with R. F. Engle, J. Rice, and A. Weiss, Journal of theAmerican Statistical Association, 81, 1986, 310–20.

“Estimation of Common Long-Memory Components in CointegratedSystems,” with J. Gonzalo, Journal of Business and Economic Statistics,13, 1995, 27–35.

BLACKWELL PUBLISHERS

“Time Series Modelling and Interpretation,” with M. J. Morris, Journalof the Royal Statistical Society, Series A, 139, 1976, 246–57.

“Forecasting Transformed Series,” with P. Newbold, The Journal of theRoyal Statistical Society, Series B, 38, 1976, 189–203.

“Developments in the Study of Cointegrated Economic Variables,”Oxford Bulletin of Economics and Statistics, 48, 1986, 213–28.






“Separation in Cointegrated Systems and Persistent-Transitory Decom-positions,” with N. Haldrup, Oxford Bulletin of Economics and Statistics, 59, 1997, 449–64.

“Nonlinear Transformations of Integrated Time Series,” with J. Hallman,Journal of Time Series Analysis, 12, 1991, 207–24.

“Long Memory Series with Attractors,” with J. Hallman, Oxford Bulletinof Economics and Statistics, 53, 1991, 11–26.

“Further Developments in the Study of Cointegrated Variables,” with N. R. Swanson, Oxford Bulletin of Economics and Statistics, 58, 1996,374–86.

“An Introduction to Long-Memory Time Series Models and FractionalDifferencing,” with R. Joyeux, Journal of Time Series Analysis, 1, 1980,15–29.

BUREAU OF THE CENSUS

“Seasonality: Causation, Interpretation and Implications,” in SeasonalAnalysis of Economic Time Series, Economic Research Report, ER-1,edited by A. Zellner, 1979, Bureau of the Census, 33–46.

“Forecasting White Noise,” in Applied Time Series Analysis of EconomicData, Proceedings of the Conference on Applied Time Series Analy-sis of Economic Data, October 1981, edited by A. Zellner, U.S. Depart-ment of Commerce, Bureau of the Census, Government PrintingOffice, 1983, 308–14.

CAMBRIDGE UNIVERSITY PRESS

“The ET Interview: Professor Clive Granger,” Econometric Theory, 13,1997, 253–303.

“Implications of Aggregation with Common Factors,” EconometricTheory, 3, 1987, 208–22.

CHARTERED INSTITUTION OF WATER ANDENVIRONMENTAL MANAGEMENT

“Estimating the Probability of Flooding on a Tidal River,” Journal of theInstitution of Water Engineers, 13, 1959, 165–74.

THE ECONOMETRICS SOCIETY

“The Typical Spectral Shape of an Economic Variable,” Econometrica,34, 1966, 150–61.

“Modelling Nonlinear Relationships Between Extended-Memory Vari-ables,” Econometrica, 63, 1995, 265–79.

“Near Normality and Some Econometric Models,” Econometrica, 47,1979, 781–4.

xiv Acknowledgments






“Investigating Causal Relations by Econometric Models and Cross-Spectral Methods,” Econometrica, 37, 1969, 424–38. Reprinted inRational Expectations, edited by T. Sargent and R. Lucas, 1981, Uni-versity of Minnesota Press, Minneapolis.

“Advertising and Aggregate Consumption: An Analysis of Causality,”with R. Ashley and R. Schmalensee, Econometrica, 48, 1980, 1149–67.

“Co-Integration and Error-Correction: Representation, Estimation andTesting,” with R. Engle, Econometrica, 55, 1987, 251–76.

ELSEVIER

“Testing for Neglected Nonlinearity in Time Series Models: A Compar-ison of Neural Network Methods and Alternative Tests,” with T.-H.Lee and H. White, Journal of Econometrics, 56, 1993, 269–90.

“On The Invertibility of Time Series Models,” with A. Andersen, Sto-chastic Processes and Their Applications, 8, 1978, 87–92.

“Comments on the Evaluation of Policy Models,” with M. Deutsch,Journal of Policy Modelling, 14, 1992, 397–416.

“Invited Review: Combining Forecasts – Twenty Years Later,” Journal ofForecasting, 8, 1989, 167–73.

“The Combination of Forecasts Using Changing Weights,” with M.Deutsch and T. Teräsvirta, International Journal of Forecasting, 10,1994, 47–57.

“Short-Run Forecasts of Electricity Loads and Peaks,” with R.Ramanathan, R. F. Engle, F. Vahid-Araghi, and C. Brace, InternationalJournal of Forecasting, 13, 1997, 161–74.

“Some Recent Developments in a Concept of Causality,” Journal ofEconometrics, 39, 1988, 199–211.

“Spurious Regressions in Econometrics,” with P. Newbold, Journal ofEconometrics, 2, 1974, 111–20.

“Some Properties of Time Series Data and Their Use in EconometricModel Specification,” Journal of Econometrics, 16, 1981, 121–30.

“Seasonal Integration and Cointegration,” with S. Hylleberg, R. F. Engle,and B. S. Yoo, Journal of Econometrics, 44, 1990, 215–38.

“Long-Memory Relationships and the Aggregation of DynamicModels,” Journal of Econometrics, 14, 1980, 227–38.

“A Long Memory Property of Stock Market Returns and a New Model,”with Z. Ding and R. F. Engle, Journal of Empirical Finance, 1, 1993,83–106.

FEDERAL RESERVE BANK OF MINNEAPOLIS

“The Time Series Approach to Econometric Model Building,” with P.Newbold, in New Methods in Business Cycle Research, edited by C.Sims, 1977, Federal Reserve Bank of Minneapolis.

Acknowledgments xv






HELBING AND LICHTENHAHN VERLAG

“Spectral Analysis of New York Stock Market Prices,” with O. Morgen-stern, Kyklos, 16, 1963, 1–27. Reprinted in Random Character of StockMarket Prices, edited by P. H. Cootner, 1964, MIT Press, Cambridge,MA.

JOHN WILEY & SONS, LTD.

“Using the Correlation Exponent to Decide Whether an EconomicSeries is Chaotic,” with T. Liu and W. P. Heller, Journal of AppliedEconometrics, 7, 1992, S25–40. Reprinted in Nonlinear Dynamics,Chaos, and Econometrics, edited by M. H. Pesaran and S. M. Potter,Wiley, Chichester.

“Can We Improve the Perceived Quality of Economic Forecasts?”Journal of Applied Econometrics, 11, 1996, 455–73.

MACMILLAN PUBLISHERS, LTD.

“Prediction with a Generalized Cost of Error Function,” OperationalResearch Quarterly, 20, 1969, 199–207.

“The Combination of Forecasts, Using Changing Weights,” with M.Deutsch and T. Teräsvirta, International Journal of Forcasting, 10,1994, 45–57.

MIT PRESS

“Testing for Causality: A Personal Viewpoint,” Journal of EconomicDynamics and Control, 2, 1980, 329–52.

“A Cointegration Analysis of Treasury Bill Yields,” with A. D. Hall andH. M. Anderson, Review of Economics and Statistics, 74, 1992, 116–26.

“Spectral Analysis of New York Stock Market Prices,” with O. Morgen-stern, Kyklos, 16, 1963, 1–27. Reprinted in Random Character of StockMarket Prices, edited by P. H. Cootner, 1964, MIT Press, Cambridge,MA.

TAYLOR & FRANCIS, LTD.

“Some Comments on the Evaluation of Economic Forecasts,” with P.Newbold, Applied Economics, 5, 1973, 35–47.

xvi Acknowledgments






Contributors

A. AndersenDepartment of Economic StatisticsUniversity of SydneySydneyAustralia

H. M. AndersonDepartment of EconometricsMonash UniversityAustralia

R. AshleyUniversity of California, San DiegoLa Jolla, CAU.S.A.

J. M. BatesBramcoteNottinghamUnited Kingdom

C. BracePuget Sound Power and Light CompanyBellevue, WAU.S.A.

M. DeutschDepartment of EconomicsUniversity of California, San DiegoLa Jolla, CAU.S.A.

Z. DingFrank Russell CompanyTacoma, WAU.S.A.

R. F. EngleDepartment of EconomicsUniversity of California, San DiegoLa Jolla, CAU.S.A.

E. GhyselsDepartment of EconomicsUniversity of North Carolina at Chapel

HillChapel Hill, NCU.S.A.

J. GonzaloDepartment of EconomicsUniversity Carlos IIIMadridSpain

C. W. J. GrangerDepartment of EconomicsUniversity of California, San DiegoLa Jolla, CA 92093

N. HaldrupDepartment of EconomicsUniversity of AarhusAarhusDenmark

A. D. HallSchool of Finance and EconomicsUniversity of TechnologySydneyAustralia

J. HallmanFederal Reserve BoardWashington, DCU.S.A.






xviii Contributors

W. P. HellerUniversity of California, San DiegoLa Jolla, CAU.S.A.

S. HyllebergDepartment of EconomicsUniversity of AarhusAarhusDenmark

R. JoyeuxSchool of Economics and Financial

StudiesMacquarie UniversitySydneyAustralia

T.-H. LeeDepartment of EconomicsUniversity of California, RiversideRiverside, CAU.S.A.

T. LuiDepartment of EconomicsBall State UniversityMuncie, INU.S.A.

O. Morgenstern (deceased)Princeton UniversityPrinceton, NJU.S.A.

M. J. MorrisUniversity of East AngliaUnited Kingdom

P. NewboldDepartment of EconomicsNottingham UniversityNottinghamUnited Kingdom

P. C. B. PhillipsCowles Foundation for Research in

EconomicsYale UniversityNew Haven, CTU.S.A.

R. RamanathanDepartment of EconomicsUniversity of California, San DiegoLa Jolla, CAU.S.A.

J. RiceDepartment of StatisticsUniversity of California, BerkeleyBerkeley, CAU.S.A.

R. SchmalenseeSloan School of ManagementMassachusetts Institute of TechnologyCambridge, MAU.S.A.

P. L. SiklosDepartment of EconomicsWilfrid Laurier UniversityWaterloo, OntarioCanada

N. R. SwansonDepartment of EconomicsTexas A&M UniversityCollege Station, TXU.S.A.

T. TeräsvirtaSchool of Finance and EconomicsUniversity of TechnologySydneyAustralia

F. Vahid-AraghiDepartment of EconometricsMonash UniversityAustralia

M. WatsonDepartment of EconomicsPrinceton UniversityPrinceton, NJU.S.A.

A. A. WeissDepartment of EconomicsUniversity of Southern CaliforniaLos Angeles, CAU.S.A.

H. WhiteDepartment of EconomicsUniversity of California, San DiegoLa Jolla, CAU.S.A.

B. S. YooYonsei UniversitySeoulSouth Korea






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