Method
If a time series is stationary, the test is performed using the level values of two (or more) variables. If the variables are non stationary, then the test is done using first (or higher) differences. The number of lags to be included is usually chosen using an information criteria, such as the Akaike information criterion or the Schwarz information criterion. Any particular lagged value of one of the variables is retained in the regression if (1) it is significant according to a t-test, and (2) it and the other lagged values of the variable jointly add explanatory power to the model according to an F-test. Then the null hypothesis of no Granger causality is retained if and only if no lagged values of an explanatory variable have been retained in the regression.
In practice it may be found that neither variable Granger-causes the other, or that each of the two variables Granger-causes the other.
Read more about this topic: Granger Causality
Famous quotes containing the word method:
“Argument is conclusive ... but ... it does not remove doubt, so that the mind may rest in the sure knowledge of the truth, unless it finds it by the method of experiment.... For if any man who never saw fire proved by satisfactory arguments that fire burns ... his hearer’s mind would never be satisfied, nor would he avoid the fire until he put his hand in it ... that he might learn by experiment what argument taught.”
—Roger Bacon (c. 1214–1294)
“You know, I have a method all my own. If you’ll notice, the coat came first, then the tie, then the shirt. Now, according to Hoyle, after that the pants should be next. There’s where I’m different. I go for the shoes next. First the right, then the left. After that, it’s every man for himself.”
—Robert Riskin (1897–1955)
““I have usually found that there was method in his madness.”
“Some folk might say there was madness in his method.””
—Sir Arthur Conan Doyle (1859–1930)